Endo International PLC (ENDP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter Endo Pharmaceuticals earnings conference call. My name is Karma and I'll be your coordinator for today. (Operator Instructions). I would like to turn the presentation over to your host for today, Mr. Blaine Davis, Vice President, Corporate Affairs. Please proceed.

Good morning, everyone and thank you for joining us. With me on today's call are Dave Holveck, President and CEO of Endo, Ivan Gergel, Executive Vice President of R&D and Nancy Wysenski, our Chief Operating Officer. After our prepared remarks, we'll open the call to your questions which Ed Sweeney and Karen Edger from our finance team group will help answer. I 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 described in today's press release and in our filings with the SEC. In addition, during the course of this call, we may refer to non-GAAP financial and in 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 current report on form 8-K filed with the SEC earlier today for Endo's reasons for including those non-GAAP financial measures in it's 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 I'll turn the call over to Dave.

Thanks, Blaine. I'm very excited about how far Endo has come since I've joined the company last year. Now that may sound like a self-serving statement, but when you look at what has been accomplished year-over-year, it is truly a credit to our management team and the support of our Board. We've diversified our commercial business and pipeline beyond pain management and repositioned the business for solid future growth. We developed a new business model, a broader therapeutic focus and a more capable, specialty infrastructure to meet our growth objectives and respond to the changes of our industry that is likely to see major change over the broad-based healthcare reform agenda that's in front of the legislative today.

We've made a major move into urology and oncology with our acquisition of Indevus, and are now generating new product sales and preparing to launch two new products in the next six months. We've shifted strategies to become a provider of integrated health care solutions to patients in multiple disease areas. Now I believe we now have a diverse commercial organization with broader capabilities to help realize that vision. We've also undertaken an entirely new approach to R&D, which Ivan will describe in a moment. Our diversification strategy is paying dividends and creating new business opportunities for Endo.

I believe we're on the right path to achieve our long-term growth targets, and that the company is in a much better shape to get there. Our financial results show we had a strong first quarter, with solid cash flow from operations to support the future growth of our organization as we continue to build the business. We remain focused on business development activities and I expect to see us execute additional deals that support our strategy to diversify our business, and support future sustainable growth. Our strategic use of cash and our future investments will remain focused on opportunities that provide the best return for our shareholders.

In summary, we're building a new Company that we believe can prosper in challenging times and across multiple therapeutic areas by maintaining our leadership in pain management, offering new products in urology and oncology, providing valuable medical solutions to all of our customers, and taking on exciting new R&D opportunities. I'm confident that we have the resources and the talent to do all of these things. Now, I'd like to turn the call over to Dr. Ivan Gergel to describe in more detail the capabilities of the R&D organization he has built over the past nine months. Ivan.

Thanks, Dave. Both the changing healthcare environment and the company's new business model have required that we create a broader R&D architecture to support Endo's products and future business plans. We've responded to this challenge in a number of ways. First, and most importantly, we've acquired the expertise we need to support a larger and more diversified business. We now have new senior staff in place to manage pharmacoeconomics, clinical operations and bio statistics. Pharmacoeconomics is a critical area for us, but we're in the process of expanding.

This team is currently focused on the upcoming launches of Nebido and Valstar and will be a critical component as we prepare to communicate the value of these products to payors. I believe our capabilities in this area are essential to demonstrate the value of our products and support our commercial business as payors have increasing influence over prescribing behavior. Second, we've reorganized our medical affairs group to focus on each of our therapeutic interests in pain, urology and oncology. And we've created a field based group that will be dedicated to pharmacoeconomics and health outcomes. And third we've shifted our generic strategy to focus not just on ANDA's but also on 505B2 filings that we believe will help our future growth. With recent senior level additions to the R&D staff, the reorganization of Endo's R&D group is largely complete. We now have the capabilities to pursue discovery and drug development across a much broader therapeutic spectrum. We're also much better organized to support our business development team.

Over the past year we've reconfigured R&D to be much more flexible and scalable to take on multiple products and to oversee them in an efficient and cost effective manner. Our team has the experience and talent to manage multiple discovery and development programs such as the collaborations we announced recently with Aurigene in oncology and with Harvard University and Grunenthal in pain management. At the same time we also have the capability to evaluate how new technologies such as the HYDRON drug delivery system can expand our product portfolio. The integration of the Indevus development team with our R&D organization is proceeding extremely well and together we are aggressively exploring therapeutic options for HYDRON.

At this point it will be premature to comment more specifically except to say we're very excited about the therapeutic options for this unique drug delivery technology and the platform it represents for future growth. We've done a lot to strengthen our approach to R&D. And I believe we now have the expanded skill sets and leadership team to manage our programs internally to make decisions quickly, to manage vendors and risk effectively and to undertake new projects successfully. Now I'll turn the call over to Nancy for her review of Endo's first quarter commercial performance. Nancy.

Thanks, Ivan. We had a good first quarter with a 16% increase in net sales over last year's first quarter. A number of market dynamics affected our first quarter results. Sales of our generic and nonpromoted products were very strong in the first quarter due to a shortage of other opioids and new support we've put behind Percocet. The strong performance of our generics and nonpromoted brands was not only encouraging, it also speaks to the value of having a diverse product portfolio and selling both branded and generic specialty products.

Lidoderm remains a strong product for us as the brand continues to generate good cash flow to support our future business growth. The decline in Lidoderm sales year-over-year was mostly a result of a first quarter inventory work down by wholesalers. And a change in formulary access with New York Medicaid as well as other shifts in regional managed care coverage that occur each year as contracts are renegotiated. We've taken a number of steps to strengthen the Lidoderm franchise, including refining our physician targeting and introducing new promotional efforts to support the brand. We're also continuing to redirect our managed care efforts regionally, as I've discussed on previous calls. And increase our care giver and patient education activities and post-herpetic neuralgia as part of our communities of care initiative.

We're partnering with The National Pain Foundation, The National Counsel on Aging and The Visiting Nurses Association of America to launch The Patchwork of Hope Network. This program targets older Americans and care givers and is designed to raise awareness of PHN symptoms and the treatment options. We believe these activities will be successful in maintaining Lidoderm's leadership in the PHN market. The Opana franchise had a strong quarter as the product continues to steadily gain market share in a competitive class. We've tightened up our physician targeting for Opana and these efforts are beginning to pay off. In addition, our strategy to aggressively contract with managed care continues to produce solid increases in volume as we broadened our access for the brand.

Voltaren Gel sales were $12.3 million for the quarter. And prescription trends were good and on track with our forecast. We recently modified our packaging with the product now being offered in boxes of 3 or 5 tubes. We believe this effort will improve our tubes per prescription. Last month, we also announced our support of a new National Osteoarthritis Disease Awareness Campaign to educate the nearly 27 million Americans who suffer from osteoarthritis and how they might manage joint pain and maintain their physical fitness. Sales of the newly acquired products, Vantas and Supprelin were also strong during the quarter, reflecting high satisfaction among patients and physicians and the effectiveness of our sales and marketing teams for those brands. With the integration of Indevus complete, we're now beginning and will continue to shift some of our sales and marketing resources to put additional reps and dollars behind those products to continue their positive momentum and solid growth trends. We've also extended for six months our co-promotion agreement with Allergan for Sanctura XR which will run through the third quarter of 2009.

I'm very please to announce that all of the Indevus, urology and endocrinology sales reps have agreed to join Endo, which is exciting and creates new opportunities for all of our sales teams, especially as we prepare for the launches of Nebido and Valstar. We've been able to reorganize our entire sales team and marketing organizations into therapeutic areas and put in place new leadership of these commercial business units. These adjustments are enabling our commercial organizations to support a much broader product pipeline in multiple therapeutic categories. All of which of course also bodes well for future product sales, and our ability to acquire and support additional products. That concludes my remarks. So I'll turn the call back to Blaine to provide a brief review of our first quarter financials.

Thanks, Nancy. Just like to take the opportunity to remind everybody that our first quarter financial results include the integration costs associated with the acquisition of Indevus as well as sales of Indevus products and their operating expenses as of February 23rd. For the first quarter of 2009, we had net sales of $335 million, up 16% over the first quarter of 2008. Selling, general and administrative expenses were $120 million for the quarter, while R&D expenses were $28 million. First quarter adjusted net income was $79 million, up 16% over the first quarter of 2008. Our diluted earnings per share declined to $0.33 versus $0.44 in the first quarter of 2008. While our adjusted diluted earnings per share rose 31% to $0.67 versus $0.51 in 2008. As mentioned previously, our generics in Opana franchises helped drive our solid topline performance for the quarter. In addition, we effectively managed our operating expenses as we focused on completing the acquisition and integration of Indevus while we also evaluated opportunities for additional investments in our newly acquired products Supprelin and Vantas. This concludes our prepared remarks. We would now like the Operator to open the call to your questions.

(Operator Instructions) And the first question comes from the line of David Windley from Jefferies & Company. Please proceed.

Hi. Thanks for taking the question. Kind of off the beaten path a little bit, but Nancy you talked about the reorganization of commercial resources around therapeutic groups. You are I think in the process of evaluating the effectiveness or usefulness of the contract sales force and I wondered if you could elaborate a little bit on how that may or may not fit into your plans going forward.

Well, actually, as you know, the contract sales force was seen as an extension to our generalist sales force at the point that we licensed and launched Voltaren Gel. That launch effort is now just about one year underway and has been very successful. We're pleased with the results. And we've also been able to assess with the broader group of targets that we started with, where we have really successfully impacted the marketplace and where we can pull some of that effort away. So we are actively reconsidering the size of the contract sales force as we feel that we are really right-sized in terms the not only our generalist and pain specialty forces, but now our urology and endocrinology sales forces. And we are likely to be able to actually make some decreases in the number of contract sales reps needed as we've gotten through that launch phase of Voltaren Gel.

Okay. Thank you.

And the next question.

And the next question comes from the line of Gary Nguyen. Please proceed.

On the weaknesses in prescriptions for Lidoderm, could you just describe what the dynamics are in that market? Are you actually losing share to Flector and Voltaren Gel and have there been any change in promotional efforts on Lidoderm? And also do you expect some of those declines to turn around? And how much pricing pressure, if any, are you seeing from formularies.

Thanks Gary, great questions. As you know, probably the TRX growth for Lidoderm was down 1.6% and yet, net sales declined 4.9%. And I want to reiterate that of course we don't give product specific guidance but I would like to talk to some of the various factors that have or can likely affect product performance quarter-over-quarter. We believe that the changes in inventory during the first quarter reflected a net work down. And that may be one of the larger factors. We do expect those inventory levels to rise again over time. And consistent with the DSA agreements that we have, the distribution service agreements with wholesalers. However, the economic environment has had an impact on prescription trends I think across the board. Probably had some effects on Lidoderm as it is an add-on therapy in many cases, used in combination with other drugs that are prescribed to treat post-herpetic neuralgia. And with that all of that said, we've also have had some effect from the loss of Medicaid in New York as we spoke to last year. As you know, that state put us on a prior off and we think we've seen the vast majority of the impact on that. As you would imagine, when these accounts are lost, you actually give us some volume, but you pick up on price. And that's why I mentioned in the script that we are continuing to focus on our regional managed care efforts so that we can promote the drug actively where we know there are opportunities.

And just I guess you didn't address, are you losing any shares to other products in the category? And it sounds like you would not really see more pricing pressure from [ Inaudible ] going forward.

Yes, we do not expect in 2009 to see a lot of additional pricing pressure and as Lidoderm is one of few drugs indicated for post-herpetic neuralgia, I can't really speak to the other indications that Flector would be used for, but we are seeing net gains in our prescriptions for PHN.

Okay. Thank you.

Thank you, Gary. You have the next question?

And the next question comes from the line of Gregg Gilbert from Banc of America, Merrill. Please proceed.

Thanks, a follow up on Lidoderm. Nancy, aside from prescription demand and things that affect that, how should the net sales per prescription change in '09 versus '08? You mentioned inventory change, which obviously impacted things. But that aside, should net sales for prescription be up, down or flat in '09 versus '08?

We do not expect significant changes. Those numbers will bounce around over the course of time. But we do not expect a significant change in that trend.

Okay. Thanks. I have more but I'll get back in line. Thanks.

And the next question, please.

And the next question comes from the line of Adam Greene from RBC Capital Markets. Please proceed.

Thanks. Good morning. I was hoping you could update us on the Opana ER litigation with IMPAX. I believe a trial had been scheduled for November. Is that still accurate? The next step in the case, if you would? And also I think about a year ago, you had explored settlement talks with IMPAX. If there's any update regarding that, that would be great.

So getting to the latter part of the question first. We would not comment on any discussions that we would have with any of the paragraph four challengers that we have. I think as we talked about last quarter, we did execute a settlement with Actavis with two of the dealtage forms, for Opana ER. Relative to your question on the timing of the litigation, it's on going. And I think we do not have any specific dates that we're in a position to discuss at this point in time.

Is the trial still scheduled for November or no?

At this point, I can actually get back to you relative to the exact scheduling of that.

Thank you.

Sure.

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

Good morning. Thanks for taking the question. Another Lidoderm question. Could you update us on the number of reps who currently have Lidoderm as their primary detail and how that has changed over the past couple of quarters? And if I could sneak in a quick factual one on Voltaren Gel, the current tubes per prescription there.

Sure. Let me see if I can hit both of those for you. Lidoderm is promoted by of course our generalist sales force of 360 reps, which has historically been dedicated to supporting our pain products, but in the future will also provide generalist support for our newly acquired products in urology and endocrinology. In addition, Lidoderm is supported by an additional 160 of our pain specialists. And during the second half essentially of 2008, we had some additional calls coming out of the contract sales organization. So, we believe that Lidoderm has good support and in fact the research shows that we do own the vast majority of the share voice in that marketplace for PHN. On Voltaren Gel, we're actually doing quite well there. Even though the three and five packs are really just beginning to hit the market, we had achieved a 2.24 tubes per script average and that's right in line with what we were predicting for this year. So again, we're hoping we're going to see some additional upside from the launch of the new packages and we're pleased with the way both the total prescription as well as the growth in tubes per prescription are moving for Voltaren Gel.

And could I quickly follow-up on the Lidoderm numbers. How would you expect that to change in 2009, especially if CSO is whittled down?

Yes. The CSO essentially has always promoted Voltaren Gel in it's first position. So I want to be very clear, that the reason we're considering pulling back on the contract sales organization is because we've had a successful launch for Voltaren Gel and we won't require that amount of effort moving forward. And again, we've learned where it was effective and not as effective, so now we can really hone our targeting. Lidoderm was a secondary call to really share some of the overhead across the cost of that sales force. Now, we've just completed a new analysis and we are very confident that we can actually increase the number of Lidoderm calls for the remainder of 2009. And then later launch Nebido by using the sales forces that we currently have and achieving actually levels that are even greater than the total PDEs that we're delivering right now for Lidoderm.

Thank you.

Sure.

And our next question comes from the line of Gregg Gilbert from Bank of America, Merrill. Please proceed.

Thanks. Blaine or someone else, can you describe the market shortfall in the generic market that you alluded to and why should we not continue you to expect to benefit from that on a more permanent basis?

Yes. I think the disruption there was related to a couple of different factors. We did see some manufacturing shortfalls from some of the competitive elements in that space. So that was one of the pieces. I think some of that is likely not to be sustained, kind of beyond the second quarter. It's a little bit too early to really say exactly how long it's going to last and how long the shortages will potentially last on the manufacturing front. I think the other piece, to some of the performance in generics business in the quarter, also associated with some of the other third parties that supply generic opioids. So we were able to capture some of the benefits of those two factors in the market. The sustainability of that benefit at this point, we do expect it to continue through some period of the second quarter. I think it's again a little bit unclear as to how long that will last, but certainly it was a strong upside performance in the first quarter that we were able to benefit from. I think, again, going back to Nancy's comments that she made in her script. I think it does speak to the value of having a diversified business. Both on the branded and generic side and I think the upside benefit that we saw in that business, while it was unexpected, was certainly supportive of the strategy that we have for the business.

Would it be fair to conclude that the quarterly sales level for generics ought to be higher than it had been for many quarters in the past but not quite as high as it was in Q1? Is that a good way to think about it?

Yes, I think that's a reasonable way to think about it. It's always tough to partial out what it would have been in the event that these events didn't happen, Gregg, but I think it's safe to assume the sales would have been higher. And I think, another point it make, we have put some additional support in our generics business. More specifically around the development side in that area, but we've also initiated some campaigns around Percocet as well to increase awareness there. So those are some strategies that we think have provided some benefit to that area of the business.

And one for Dave, if I could. Dave, what are your most burning priorities right now in terms of external activity business development priorities? I know that you painted the picture of what you would like Endo to look like down the road but how are you thinking about the order of things, the order in which things occur from here? Thanks.

I appreciate it. And again the direction that we said, is that strategically with the addition of Indevus both infrastructure as well as the products, I think when you look at the products that we have there notably that focus in the urology space as well as endocrinology and then more specifically against the specialty of urology and the urologist, what I want to be able to see us do is fill that out, if you would, with the ability to add more products to give a more complete solution and a more efficient call point relative to our reps that are in that franchise. Do not take me wrong in a sense that we're not looking at how to advance the pain, we certainly have opportunities there. But to your question, how do we see our prioritization, I think the first thing is to be able to fill out more products in the urology sector, where we have now a position. And then equally, continue to source where possible opportunities in the pain franchise.

Thanks.

The next question, please.

The next question comes from the line of Rick Silver from Barclays Capital. Please proceed.

Given the importance of the inventory shift on Lidoderm, it sounded like that was the number one reason in the quarter behind the trend. Can you tell us when you would expect the inventories to rise again and at sort of what level relative to what we've seen in the past? And then just on SG&A, can you give us any sense of trend line there, how we should be thinking of it on a quarterly progression?

Rich, I'll take the first half of the question. I think you can expect Lidoderm inventories to shift slowly throughout the next quarter and even the rest of the year. I'll turn the other half over to Blaine.

Sure. Though on the SG&A line, I think as we had talked about, we did have some cost containment in the first quarter. Some of that activity was associated with making sure that we integrated and executed against the Indevus transaction. I think the other element in the first quarter that you saw was evaluating potential investments that we could put behind products that we inherited from Indevus including Supprelin and Vantas. So we would expect an increase in SG&A over the year. Again, as we talked about on the last quarter call that we would anticipate a year-over-year increase in SG&A. Albeit that increase would be slight. Remember also that the increase in our operating expense line broadly both R&D and SG&A was going to be offset by $40 million in cost savings that we are at well in route to execute against during the year. So again an increase in SG&A throughout the year, but again offset by the cost savings that we are in the process of executing against.

Thanks.

Sure.

The next question comes from the line of Corey Davis from Natexis. Please proceed.

Thanks. Just a couple of questions. First, on the logistics of implementing a new REMs program for Opana, what is it like interacting with the other 16 companies out there? Do you have direct interaction because I can imagine the competitive dynamic would be a little bit weird talking to them about it or is it just more of a passive role waiting for the FDA to tell you more about what to do?

A couple of points here, Corey. One is, obviously, we do have a REMs in place already for Opana. That's important. And that was something that we worked very closely with FDA to put in place. Clearly we feel it's very important to work with the FDA to ensure that the clot and specifically Opana ER remains available for the appropriate patients. And we are working collectively with other companies and the agency to try and optimize a REMs program.

I don't suppose you would want to offer a time frame at this point for when something would actually be --

I can't do that, no.

And while I've got you. I know you've been very secretive about your pain project with Grunenthal and we understand that. But at what point do you think you would be able to talk more about the attributes of that product especially as J & J starts to make a bigger push with [Axomadol]?

Yes. So the product of course is Axomadol and we will be going into Phase II B studies as well as Grunenthal going into Phase II B studies at the end of this year. These will be significant programs. I think the best time to talk about those more extensively is when we have some out come from those studies.

Sometime in the 2010 or would it take longer than that?

It may be the end of 2010, beginning of 2011.

Okay. So not for a while. Last question on Voltaren Gel, should we -- well first question is how long do you think it will take for the one-tube inventory to work its way through the system? And should we think of it as we'll probably see a drop in prescription volume from IMS but that will be more than made up for in the value per script from the number of tubes per script?

Yes. Corey, that's a great question. We believe that the majority of the single tubes have worked through the system now. And we're seeing pickup on the 3 and 5, even though of course we'll have to deal with revenue recognition issues about how quickly those are pulled through. But your assumption is absolutely correct. As you are aware, our WAC costs as of January of this year is 2309. And although, we will take some slight discounts in order to get those new packages stocked, we expect that price to carry forward in prescriptions that will be either 3 or 5 times the average that we've had. And therefore, less frequently written. You're absolutely right. We do not expect that all single tube prescriptions will vanish, but we do expect them to decline.

And last question, probably for Dave, any update on your search for a new number two CFO?

Yes. That's correct. And that search is I think going along very successfully. I would like for a special set of qualities which I think I found. And we'll see an announcement imminent on that aspect.

Great.

Go to the next question, please.

And the next question is from the line of David Buck, from Buckingham Group.

Hi. It's Jim Dawson for David Buck

Hi, Jim.

You did talk about the Lidoderm inventory tractions during the March quarter. What about your other branded drugs. Any other inventory movements or shift there?

Yes, it was an interesting quarter because we had inventory impacts on really three out of the four. So we've talked about the one on Lidoderm. We also had some interesting shifts, if you will, with Opana because we had introduced new strengths earlier, in the middle of last year. And so that's still sort of playing through in how they manage inventory. And then also, we think we had a little bit of an inventory work down on Frova as well.

Okay. And let's see. As far as your -- you talked about your strength in your generics in the first quarter and the second quarter. This is more of guidance for that. Does it include a generic version of immediate release Opana?

Go ahead. So again, not giving product line guidance, I think relative to -- I think you're asking about an authorized generic on the Opana IR piece. At this point we wouldn't be in a position to say whether we would introduce an authorized generic in the event generics come to the market for the IR version of Opana at the middle of this year. Keep in mind we do have a generics business so we would evaluate the best approach to doing or not doing an authorized generic in the middle of this year.

Great. Okay. Thank you.

Thanks. Can we go to the next question.

The next question comes from the line of Shibani Malhotra from Goldman Sachs. Please proceed.

Hi. This is a question for Blaine. On gross margin, you guys came well ahead of at least where we had modeled. Can you just talk about what drove the strong gross margin and then give us guidance on how to think about this going forward. Is it a shift in products or is it something else we should be aware of?

Yes. So thanks, Shibani. So relative to the gross margin, as we spoke about in the previous quarter, we did expect on an adjusted basis to see a decrease in the gross margin. The decrease of that gross margin was largely driven by the full year impact by the Opana ER royalty stream that we pay out to Opana West which does come out of the cost of goods. I think the other impact on the gross margin line for the full year will be the impact of the Indevus products being brought in although that's a fairly minor impact to the gross margin. So overall again, the first quarter gross margin that you did see on an adjusted basis, we would see that as continuing to decline slightly throughout the year. Again, as a result of those two factors.

Okay. Thank you.

Sure.

The next question comes from the line of Gene Mack from Lazard Capital Markets. Please proceed.

Thanks for taking the question. Can you just tell us, for Lidoderm, where inventories were at the beginning of the quarter versus where they stood at the end of the quarter? Thanks.

We cannot really get into sharing information quite that specific. Sorry.

And the next question comes from the line of Irina Bozin from UBS. Please proceed.

Irina?

Hello. Sorry. I'm calling on behalf of Marc Goodman. Yesterday some long-term data came out on Nebido and there was a side affect for elevated PSA. Is this something that is seen in the other testosterone products and are you concerned that this may cause a hiccup in the approval again for the product?

No. Especially it is -- we believe it is seen in other products. And we don't believe this will be an issue for the approval of this product.

Thank you.

And the next question comes from the line of David Amsellem from Piper Jaffray. Please proceed.

Just a question on Nebido. You can remind us what is the status of the US IP for the product?

Sure, David. We currently have one patent that has been allowed. But not issued. Should it be that patent will be provide coverage until 2024. And we have a second patent pending and we will continue to actively prosecute these patents.

Okay. And then second question. Do you still expect Phase III data for octreotide implant on the second half of this year?

Well, the study is on going at this point. It is -- it's an open label study, so we can -- we're looking at data from that study on an on going base. So, we continue to collect data as the patients are entered into the study and they continue to be enrolled and on going in the study. When the study will complete, however, we cannot be specific about that just now.

Okay. And then one last question, if I may. Just to be clear, are -- it doesn't sound like you're planning to add any new reps to support the launches of Nebido and Valstar, rather than reallocating reps. I want to just make sure that that still is indeed the case.

Yes, that's generally a correct assumption.

Okay. Thanks.

You're welcome.

And the next question comes from the line of Scott Hirsh from Credit Suisse. Please proceed.

Hi, there. You guys mentioned you're preparing for the two product launches and that you extended the Sanctura co-promotion through the third quarter. You can give us an update on what the launch plans are for Nebido and Valstar and then what the plans are for Sanctura post third quarter?

Sure, well we cannot really speculate first of all on Sanctura because those agreements are negotiated and we're not at a point where we would be entering into the next round of discussion. So we cannot comment on that. But we're very, very excited about the two launches that will have the opportunity to drive, one in the third quarter and one in the fourth quarter, secondary to the acquisition of Indevus. The first one, Valstar is a very interesting product. It has much less risk associated with it because it truly is not a launch. It's a reintroduction of the product. So we would not have some of the challenges you normally expect around DDMAC approvals of materials and so forth. That drug has also been on the FDA's drug shortages list for quite some period of time. And for patients who are suffering from bladder cancer, following first line treatment with BCG therapy, there is absolutely nothing else for physicians to use now within a drug's labeling. And as we go out and do ad boards and prepare for that launch, we are hearing a huge amount of pent up demand. We have reallocated some resources from both financially as well as personnel. We've moved a new product manager over there to support that product full time. And having just returned from the AUA, he was quite impressed with the volume of questions that are coming up and physicians are actively asking when we'll be able to launch this.

Nebido, as you know, is a much larger audience. Will likely be a far larger product. We're very excited about Nebido because it's introducing innovation into a growing market. On top of the approximately 20% growth year-over-year, the patients who are currently identified and treated for hypogonadism really only represent, we believe, about 10% of the market potential. So there is a lot of opportunity there since it's very much under diagnosed. And we think that we're really going to be well positioned, because we've already got representatives calling on all of the specialties with the exception of adult endocrinology and we'll be able to leverage our strong managed care infrastructure and also our pharmacoeconomics team which Ivan mentioned, has just been put in place. So that's one of their first focuses as they build out this good function here at Endo.

And then just real quickly on the R&D. You guys spent roughly a little over $90 million last year and Indevus spent almost $25 million. But some of their products have graduated as we have just talked about and will be coming to market. And many of the historical R&D products in your pipeline have been canceled. Where is the real focus of R&D spending right now, the bulk of it?

Clearly there's some focus on the octreotide program. We're ramping up for the Axomadol program as we spoke about previously. There is also the -- we're doing some work on Pagoclone. We're doing some life cycle management work and we've got some earlier phase work that we haven't been specific about. It's a bit early to talk about at this point.

Okay. Thank you.

Thanks, Scott.

And the next question comes from the line of Elliot Wilbur from Needham & Company. Please proceed.

Thank you. Maybe just follow up on Nancy's commentary around Valstar. I think that the target patient population is something around 15,000, but we do not really have any information on treatment costs associated with the product and sort of what our realistic penetration expectations of that eligible population. I'm just trying to get a sense of your thinking in terms of the rough parameters around the market opportunity for this product. And then a question for Blaine, is while you mentioned the settlement with Actavis on the two strengths of Opana but just want to make sure that I understand this correctly. The settlement basically allows them to launch across all strengths. I want to make sure I understand that. Thanks.

So first of all, on Valstar, I don't think it would be appropriate for me to comment on pricing at this time. But you're right. This is not a huge market. I think the way that you can look at it is if you look at the total number of diagnosed cases of bladder cancer, understanding that this drug will be indicated for BCG failure in those patients, about 40% of them do fail on BCG. So, you can sort of use that as a model to think about what potential might be.

So, on the question relative to the settlement with Actavis, again, just to remind you, IMPAX was first to file on a number of other dosage strengths. The settlement that we actually signed with Actavis was associated with a 7.5 and 15 milligram dosage strengths with which they were the first to file on. It does allow them to come to market with those two dosage strength in the middle of 2011, however they can come to market with the other dosage strengths provided that others come to market prior to that point. So , the six months of exclusivity that IMPAX has a result of first to file does need to expire for Actavis to come to market for all of the other dosage strengths. So, again, Actavis was the first to file on 7.5 and 15, while the settlement was for all of the dosage strengths it only allows them to come to market with 7.5 and 15 in the middle of 2011 unless others have come to market prior to that point and expired the six months of

And the next question comes from the line of Patti Bank from Wedbush Securities. Please proceed.

Good morning. A couple of questions. On the generic side, I wonder Ivan if you can talk a little bit about the portfolio there. Last I heard there were six ANDA's under review. So I guess if you could confirm that? And maybe just any color you could add on how big those potential opportunities are? How big the branded products are that they address? And then also on the HYDRON technology, any idea -- or can you give us some guidance as to when we might hear more about the R&D programs there?

Sure. On the first one, you're correct on the six ANDA's. We cannot give more specific information on that. And regarding HYDRON. Clearly we're very excited as been mentioned previously, we're very excited about HYDRON. We see it has broad applicability particularly in areas where compliance is important and areas where one wants to give long-term sustained levels of drugs. And therefore there is clearly a lot of potential applications of this platform. We've started to undertake within R&D a thorough review of where we might utilize the HYDRON technology and that's both across the areas we're strategically interested in, oncology, urology and the pain space, but in addition we may also consider actually partnering or out licensing HYDRON at a certain point in the life cycle too.

Ivan, one other element relative to the HYDRON is second generation of this delivery platform. And again, you may want to put a little bit more color commentary behind that, but at this point, we do have a second generation that we're also in development with . And this I think, and I'll let Ivan give a little bit more specificity on, it but we think it gives a bigger dynamic range and will accommodate more drugs.

That's right, We're very excited about generation II at this point. Certainly, it had a -- potentially has a broader applicability than generation I and there are other advantages to it at this point. But it will be (inaudible) premature to go into specifics on those other advantages now.

(multiple speakers)And I think we be able to in fact stop that in terms of information more in the first quarter of '10. We'll have more information there.

And then just one other quick question. Maybe for Blaine. On the royalty on Nebido, can you just confirm is that 25% and does that come out of the gross margin line?

That's correct.

Thank you.

Yes.

And the next question comes from the line of Jim Malloy from Caris. Please proceed.

Hi. Thanks for taking my question. You guys have been very generous with your time. Certainly covered most of the issues here. Almost down to asking who you like in Kentucky Derby now.

We have points of view there. So go ahead.

Just two quick questions. On Lidoderm, can you talk a little bit, I thought with the wholesale management agreements, there was the ability to de-stock was kind of limited. You can talk about the type of wiggle room of de-stocking that can happen even with these agreements in place. And the question was asked and I don't think it was answered about the pricing increases for Lidoderm. And final point on the Octreotide, in the past I think the guidance has been toward the end of '09 and early 2010 for the data. Is that being pushed out to later in 2010 or is the end of the year still kind of the time frame we should be thinking about?

So on Lidoderm you're absolutely right, we do have the service agreements with wholesalers in place. We obviously, we're at the high end of the range in some cases. And that was where the workdown came from. I can't be any more specific than that, unfortunately. Pricing on Lidoderm, the WAC price following our 4.5% increase in January is 183.7 and $0.79. So we do not see any changes there. And perhaps what you were referencing Jim, that I didn't pick up was ASP, I think again there is always a little bit of fluctuation depending on which rate -- rebates we see when, from which customer and what their current rebate levels are. But we do not expect huge changes there.

And on Octreotide. So, I'll say a little bit more. The acromegaly study is actually recruiting very very well. It's probably ahead of the schedule for the Phase III study. And as I said, we're looking at data on an ongoing basis. It's really slightly early to predict if this study will be complete in 2009 at this point. We'll have more information sort of later on this year. But at this point, it's difficult to be more specific than that. As I said, we're looking at the data as it comes in.

Okay. Thank you for taking the questions.

Sure.

And the next question comes from the line of Scott Henry from Roth Capital. Please proceed.

Thank you. Question for David. Going back to the opening remarks, there are a lot of positive comments on the pipeline. And my question is really, if we can get any kind of quantifiable numbers to that enthusiasm. Just so I can better understand the way you're thinking about it. Really, if you could prioritize in the pipeline what it is that drives your enthusiasm. And at least if you can put a kind of a bucket around potential revenues for these products and a time frame to reach those. I don't know that you'll answer these questions, but I think it would be helpful to try to understand your tone.

Yes, well I have views on it and I appreciate the question. Because again, the opportunity and where the enthusiasm comes from is again, year-over-year we really didn't have any new launches that were going to be proposed in '09. So from the standpoint of how we wanted to quickly diversify the business, and add new revenue streams on to the business, we're enabled to do that in '09. Now, the enthusiasm behind that, which I think Nancy reinforced but let me put a little bit sharper point on it, is that we have roughly 700 salespeople out there. And again, those individuals, and we said this, can be looked at as we look at these launches, as opportunities to really shift and put more personal selling against these new models. And again, that is really a -- I think a prerequisite as you start to introduce new innovation. So in the standpoint of the first element of enthusiasm, is being able to have incremental new revenues and the ability for very strong sales team to be put against that for '09. Then you go forward into '10 and beyond.

I think Ivan talked about the Octreotide. Again two opportunities there. Acromegaly and Carcinoid syndrome and those are very definable in process. So here again, the pipeline is not something we may have but we're actively moving there. You go farther out and you obviously have the Grunenthal. You start to put into play then coming back to our generics business, we put a fairly aggressive plan in place to license in new APIs which we did. We bolstered that organization, both with some capital and skill sets . Which by the way really do coincide very nicely with the bill that Ivan put into the development side. As I mentioned, it's a generics business that is not just ANDAs, it's -- Ivan really brought this forward, ANDAs, but 505(b)(2) developments sites. So, the infrastructure that backstops that investment is in place. And then lastly to the topic is that we have a new platform for drug delivery, which is clearly safe and effective and on the market with HYDRON. So we can expand that in the second generation. So when I sit here today and look at the path forward, while I do see and the importance and the sustainability of our base business, which by the way I feel very strongly about and moving in the right direction, but then back again in looking at the relevant strength of both near and mid-term pipeline, and the people to support it, both Ivan has brought forth as well as the sustainable plays that support our base business that can be expanded against the new, yes, I'm pretty positive about it all. I think it's a great model. And in this plan that we have, it's a great place to be at this point, relative to all of the other changes going on in the environment. I think we're truly a growth

Okay. Well I appreciate that color. I guess at some point it would be nice to get some numbers to put around that enthusiasm. But we can certainly wait for that. Just one followup question as well, with regards to the pipeline. When you think about R&D as a percentage of sales, it has declined significantly in the past year. Where would your target rate be, if you have an idea about that? Over 10% at some point, or do you like it where it is right now? I mean obviously opportunities available is a factor as well.

Yes, this is Blaine. I think it's always a little bit challenging to put targets on percentage of sales of R&D spending because I think you have to time it relative to programs and investments that you want to bring into the R&D organization. I think some of the comments that Ivan made and the structure that he's created in being cost affective in managing external partnerships, that gives us more flexibility to manage multiple programs in a cost affective way. I think that the percent of R&D spend versus sales at this point is low. We do expect that to increase as we continue to do business development deals and bring in additional compounds into that organization. I think you'll definitely see an increase over time. But at this point, I don't think we want to put a longer term target on it other than to say, as we add programs which will then translate into commercial opportunities, R&D spend will clearly increase.

Thank you for taking the questions.

Sure. And we have time for two more questions.

And the next question comes from the line of Michael Tong from Wachovia Capital Markets. Please proceed.

Hi. Just want to clarify the SG&A outlook going forward. Blaine, you mentioned that SG&A is going increase lightly year-over-year, '09 relative to '08 and that includes the launch expenses associated with Nebido and Valstar, correct?

Yes. That's correct Mike.

And just -- and I think you also mentioned about reallocation of sales force resources with respect to those two launches. From which -- from what products are you going to be pulling back as far as promotional effort is concerned in order to drive the Nebido and the Valstar launches?

Hi. Mike. This is Nancy. Good question. There are going to be a number of shifts that are going on. First of all, we're setting up a nonpersonal promotion sort of center of excellent if you will in our marketing department and along with the other shared services of managed market, market research, et cetera. They will find more cost effective and expansive ways to support brands as they mature. In addition, we've really been refining our targeting over the last six months. And particularly, since we were quite excited and hopeful that we would acquire Indevus, knew that we really had to look for the greatest return on investment. So as an example, we now have, although at a very competitive level and almost equivalent to the market leader, we have less effort put against Opana in personal promotion and yet we continue to generate very strong results and that trend hasn't broken at all. So I think we're just learning how to refine the placement of each of the different types of resources and another example is Frova. That marketplace is under fire right now with the first authorized generic out. It's going it get crazier in the migraine market later this year as more generic entrants enter and we're starting to proactively predict how we can shift resources that might be less effective in a situation like that to the new launches and our solid brands that we expect to continue to deliver like Lidoderm.

Thank you.

And the last question, please.

And the final question comes from the line of Tim Chiang from FTN Securities Capitals. Please proceed.

Thanks. Just one last question on your generic drug business. You highlighted that the second quarter might show some positive returns from some of the dislocations out in the marketplace in opioids. Do you expect more competitors to come back into that market in the second half of the year? Or is it really just a function of prices coming down in the second half year, just from the dislocation sort of going away?

Yes, Mike. This is Nancy. And I think your thinking about it the right way. We expect and obviously we have some early feedback in April. We expect that this is going to continue for some period of time, but that other players will reenter the market. To talk a little bit about the characterization of our specialty generics business, we're not producing products that are part of the commodity generics efforts and therefore we try to be mindful of our pricing. So as others come in and want to play that game, our participation in that market will probably pull back a little.

Do you expect also to bear some of the fruits of your generic pipeline this year or is it more of a 2010 and beyond time frame?

Yes, in terms of the product development that we're doing, those results will be seen in 2010 and beyond. The results that we're talking about right now are because of this unique market situation and also a little extra ump coming out of Percocet thanks to the non-personal promotion offers.

Great. Thanks a lot.

This concludes the Q&A for today. I would like to turn the call back over to Dave Holveck for closing remarks.

Yes. Thank you. And again, I appreciate the interest and the questions. I think it has allowed us to better position where we are in our plan both to accelerate the growth of Endo's business as well as expand the business model. We're on plan. We're where I saw the opportunities and where I saw the actions would take us. I think we're where we want to be. And we have to continue on. I think that the basis of our success will be the continuation of supporting our base business. But more importantly as you've heard from Nancy and Ivan, is bringing on new lines of revenue. I think we're all painfully aware that as we look at our industry and looking at the future of our industry, it cannot be denied that we will see changes in healthcare reform and we have to have a more diversified business model, which I think we're well on the road to developing. So I appreciate your support, your interest and look forward to reporting on this throughout the year. Blaine?

I think that's it. If anybody has any more questions, feel free to contact me directly. Thank you.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.