Endo International PLC (ENDP) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2009 Endo Pharmaceuticals earnings conference call. I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now turn the call over to your host Mr. Blaine Davis Vice President of Corporate Affairs. Please proceed sir.

Good morning and thank you for joining us. With me on today's call are David Holveck President and CEO of Endo, Ivan Gergel Executive Vice President of R&D, and Alan Levin Executive Vice President and Chief Financial Officer. After our prepared remarks we'll open the call to your questions.

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 measures that are not prepared in accordance with accounting principles generally accepted in the United States and 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 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 I'll turn the call over to Dave.

Thanks Blaine. I'm very pleased with Endo's operating and financial performance during the third quarter. Sales of our key products Lidoderm, Opana, Voltaren gel were very strong. We managed our expense base effectively and our new product development programs continue to advance. Our effort to be a more diversified Company is starting to produce results. We have revenues from a set of product and a pipeline that has been completely transformed in the past nine months. At face value it was another solid quarter, but in fact, it was also remarkable period in our history. And here is why.

First, we launched VALSTAR for the treatment of BCG refractory bladder cancer. A new opportunity for us in oncology. VALSTAR is the only FDA approved therapy for certain patient--.

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Okay. I'll back all the line. Sorry for the interruption. As I was saying, relative to Valstar and its effect relative to the patients. These patients who are refractory to VCG are ones that really pose an unacceptable risk to having a bladder removed and again Valstar represents a new treatment option when all other FDA approved treatment alternatives including BCG are exhausted. We reinforced our investment in Valstar by licensing another bladder cancer drug, urociten from Bioniche. This novel compound has the potential to change the landscape for treating cancer. We believe patients are served better by having a variety of therapeutic options from Endo, not just one. It's an example of how we're investing in multiple products within disease states. A strategy you heard me talk about before. With the challenging healthcare environment, we believe this approach to portfolio management will ultimately benefit our business and the patients we serve.

Second, we partnered with (inaudible) group to commercialize the testosterone replacement therapy for Testa in the United States. Testa is a 2% testosterone gel which uses a metered dose delivery system so that the patient can adjust their dose as necessary. We believe it has advantages over the current testosterone gel and that it complements [Avide], our injectable long acting testosterone replacement product. We negotiated a flexible deal structure for this license that emphasizes success based milestones. This deal and other mitigate our risk but allow us to pay for success. Both Avide and FORTESTA are currently pending FDA approval and both are examples of the optionality strategy we are implementing to bring patients and physicians the best possible quality of care.

Third, we enhanced our R&D organization by investing in our growing pipeline of product candidates to treat pain, endocrine disorders and cancer. Our development programs are more diversified now than ever before and include a variety of drug delivery technology that addresses the need of patients and physicians today changing healthcare market. In addition, our business development team is continuing to seek promising new products, technologies and approved products to license or acquire. I believe these are all prudent approaches to building our business in a rapidly changing healthcare environment.

Now in a moment I'll have Alan review our financial results and commercial performance for the quarter. But first, I'll have Ivan discuss our progress in R&D in more detail and review the status of our two products currently pending FDA approval. Ivan?

Thanks Dave. In my last update to the investment community, I focused on the changes we made to the R&D organization to support Endo's future business plans. Our new leadership team and their expanded skill sets are generating a new therapeutically diverse pipeline for Endo. So today, I'll provide an update on the progress we've made that has resulted in a pipeline that has two compounds under FDA review, two compounds in Phase III development and three compounds in Phase II. It is worthy to note that all of these compounds have been introduced in our pipeline in the last nine months.

First, I'll review the recent regulatory developments and then I'll highlight our Optria type program. On September 2, we received notification from the FDA that they would extend the review period of our application for our long acting testosterone injection for the treatment of hypogonadism in men which we call Avide. We've had productive discussions with the agency on a number of topics including labeling and the framework of the RIMs program, and we are pleased that the FDA did not request additional perspective studies. Our PDUFA date is now December 2 and we are working towards having our approval by or before then. We continue to believe that this therapy approved in 86 countries around the world and marketed in 50 offers patients and physicians a level of consistent and reliable treatment, not currently offered by competing products.

Turning to FORTESTA, our 2% testosterone gel for the treatment of hypogonadism in men, we recently received a complete response letter from the FDA requesting that we reanalyze some of the laboratory samples and conduct a small short-term clinical study to address the affects of hand washing to reduce transference after applying the product. We continue to believe FORTESTA is approvable and as a high concentration formulation that it represents the next generation of gel based therapy. We believe that FORTESTA will address the need of patients with low testosterone and we are moving quickly to respond to the agency's request. At this time we expect to have our complete response submitted to the agency mid 2010 at which point the FDA will determine the review time line.

Our program to develop the Optria type implant continues to make solid progress. As a reminder, Optria utilizes our high drawn drug delivery platform which is also used in SUPPRELIN LA a currently marketed product that is changing the treatment paradigm for patients with central precocious puberty or CPP. The Optria type implant is currently in Phase III development for the treatment of acromegaly, a chronic, a disorder produced by over production of growth hormone. We expect to have data from this study in mid 2010 and could potentially submit an NDA in late 2010 or early 2011 but depending the clinical trial results. In addition, we've initiated the Phase II study of Optriatide in patients with carcinoid syndrome.

We are also preparing to launch a 900 patient clinical study at 150 centers worldwide to support the development of Urocidin our next innovative product for the treatment of bladder cancer. In addition, we'll also launch Exomadol the Phase II program for pain management. We are very excited about the opportunities for these compounds, which is why we are investing in new clinical studies.

In conclusion, our new R&D architecture has positioned us well to develop a more therapeutically diverse pipeline that as David has mentioned has been completely transformed over the past nine months. We have the right people with the correct skills to manage the broad range of investment and development opportunities we are now pursuing. And I look forward to providing you with updates on our current and future programs as we remain committed to growing and expanding our pipeline. Now, I'll turn the call over to Alan to review our commercial and financial results.

Thank you Ivan. I'd like to start this morning with an update of our 2009 financial guidance. Our business continues to perform extremely well, and we now believe that Endo will deliver 2009 total revenues of between $1.44 billion and $1.465 billion. An increase versus previous guidance of 1.39 billion to $1.44 billion. The new range reflects solid sustained performance from our core business.

On the expense side, we remain focused on managing our expense based efficiently while continuing to invest in the growth drivers of our business. As we position our in line and new products for the remainder of the year and for a good start in 2010, we expect somewhat higher promotional expenditures in the fourth quarter as well we continue to invest in our R&D pipeline in order to accelerate the development of new product opportunities in our branded and generic franchises. Finally, we now expect a small 0.6% increase in our effective tax rate, reflecting the impact of ongoing activities to further enhance our commercial effectiveness. These activities have resulted in a a modest uptick in field based support personnel and programs, further enhancing the impact of our selling efforts.

Taking all of this into consideration, we are raising our guidance for adjusted diluted earnings per share to a range of $2.67 to $2.73. An increase versus previous guidance for adjusted diluted earnings per share of between $2.59 and $2.67. Reported or GAAP diluted earnings per share is now expected to fall within the range of $1.41 to $1.47, an increase versus previous guidance for GAAP earnings of $1.26 to $1.34. For the third quarter of 2009, we had total revenue of $361 million, up 14% over the third quarter of 2008. Lidoderm had a solid quarter with revenues of $193 million comparable to the third quarter of last year. Lidoderm represented 53% of our total revenues this quarter, down from 61% last year consistent with our goal of diversifying our top line.

Opana ER and Voltaren Gel saw strong script and sales growth reflecting the impact of our promotional efforts and contracting strategies. SUPPRELIN LA also perform well as did our generic business which grew 2% versus Q3 2008. The increase in our revised sales and earnings guidance reflects the underlying strength of our business and our positive outlook for the remainder of the year.

While it is very early, we are pleased with the progress of the VALSTAR launch. As a reminder, VALSTAR is the only approved therapy for its indicated use and thus we view this launch as a significant step toward improving outcomes for patients with bladder cancer. We launched the product on September 3, and received orders as soon as the first day of announcing its return to the market. Total operating expenses for the quarter were $179 million. However, on an adjusted basis, selling, general and administrative expenses were $137 million and R&D expenses were $29 million. Third quarter adjusted net income was $74 million, down 6% over $79 million during the third quarter of 2008. Our reported diluted earnings per share declined $0.42 versus $0.55 in Q3 of 2008. On an adjusted basis however, adjusted diluted EPS declined 5% to $0.63 versus $0.66 in the third quarter of 2008.

The quarter-over-quarter decline reflects the timing of investments in SG&A and R&D relative to last year as well as incremental expenditures overall vis-a-vis the urology and endocrinology franchise that we acquired earlier this year. Spending is consistent with previously communicated higher levels of investment in our commercial and R&D operations during the second half of this year.

From a balance sheet and liquidity perspective, during the quarter, we executed a cash tender offer for our Ledgemont secured 16% notes. High coupon date that we inherent when we purchased Indevus earlier this year. This tender offer resulted in Endo's acquiring $48 million of the $105 million aggregate principal amount that was outstanding. As well during the third quarter, we redeemed $68 million of legacy convertible debt as it came due. We also recently closed on a $300 million three-year credit facility with high quality banks. As demonstrated by these actions it is our intention to manage our balance sheet with an eye toward ensuring the necessary financial flexibility to invest in and grow our business. Overall, we had a solid quarter. Our base business continues to generate an attractive level of cash flow which helps to finance our business development activities thereby augmenting our efforts to diversify our business. That concludes my prepared remarks. I will turn the call over to Blaine.

Thanks Alan. This concludes our prepared remarks. I will turn it back to the operator to begin our Q&A session.

Thank you. (Operator Instructions) Our first question comes from the line of Annabel Samimy with Thomas Weisel. Please proceed.

Hi. Thanks for taking my questions. So I wanted to talk a little bit more about the guidance specifically the top line guidance. Your earlier results were generally in line with consensus and consensus has been at 1.44 for a year but you seem to have raised it and I'm just wondering is there anything specific that is driving it? Is there one product that you think is going to exceed expectations here or can you give us color on the raise on the revenue guidance?

Sure. So there is no single driver that is associated with the increase. I think it's very much reflective of a solid performance on a year-to-date basis from our business Q1, Q2, Q3. When we think about the range of guidance, there are probably two considerations as we think about setting the range for the remainder of the year. The first relates to wholesaler inventory levels for Lidoderm which currently remain near the bottom of our contractual days on hand with our wholesalers. Typically we expect to see a modest uptick in the number of days on hand in the fourth quarter particularly as we get closer to the holiday season and we'll be watching that very carefully. Secondly, with regard to Opana IR we continue to enjoy exclusively on the IR formulation of our product, although a generic could come to the market at any point in time. So that coupled with a strong core operating performance is what has led us to position the range in the new territory.

Okay. If I may ask another question, now that FORTESTA is a little bit delayed, I would say probably a good year, how are you going to address the launch of Avide into the primary care market. Are you going to hold off on that primary care market and focus primarily on specialty or are you still going to try to penetrate that bigger market?

The launch of Avide has always been, even with the legacy of the Avide with Indevus, they saw the specialist if you would being the primary early target. Again with the management of those patients and then branching out and expanding into the primary care. The infrastructure that we acquired with Indevus will be focused initially to launch the product. As we seed it in there, then we'll move the primary care. In their case of course they would probably look for contracting within our infrastructure. That's one of the avenues that we are going -- and already have built into the equation here. So we are feeling that no we are not going to delay it relative to FORTESTA. It is an opportunity, and again the whole aspect of management is gaining more and more strength. Yes, primary care certainly seeing a greater number of these patients. I also would say that the market is certainly ready for a longer action. So I think the combination of infrastructure elements that we have and the way we plan to bring it out is very synergistic even though FORTESTA is going to be a delay.

Just remind us how you are going to establish infrastructure for that primary care market?

Well, initially when we go to market with a product like Avid, we'll be concentrating our efforts not specialty sector. Typically what you will see is key opinion leaders take up the use of the new product and then primary care physician will take their cue accordingly. So we have Phil reps in the urology space that will be promoting the products. We have reimbursement specialists that will be working hand in glove with our field sales organization to ensure an appropriate up take and then over time you will begin to see more primary care physicians in that regard. We have a pretty flexible sales force infrastructure including a primary care sales force that we can flex to a particular product and dynamically redeploy as we see opportunities. As we see the up take, we'll be looking to redeploy our primary care field force accordingly.

Thank you. I'll get back in the queue.

Your next question comes from the line of Gregg Gilbert with Banc of America-Merrill Lynch. Please proceed.

Good morning. My first question is for Ivan. What insight can you provide on what is going on between the Company and the agency on Avide right now and how confident are you in the FORTESTA issues that were raised, not the hand washing requirement but the other data issues? Can you put some confidence around that and how much time you've actually had to assess your confidence in those questions raised?

Sure. Well, as you know we heard from a letter regarding avid on September 2. They want to extend the review period. We continue to believe that it is approvable. They wanted to spend a bit more time on the data to make sure that the RIMs program adequately reflected the data. We continue to work with the FDA and the target. The target they remain committed to at this point is 2nd of December if not earlier. Regarding FORTESTA, as you know, we heard from them on October the 19th. They sent us a complete response. The focus was twofold. One was to reanalysis some of the lab at that and -- data and the second was a hand washing. We looked at the safety data. We believe as we have always with this drug is approvable. The data looks good, but we will have to do a reanalysis of some of the lab data and the second one was a hand washing study. Regarding the lab data, we've looked, we spent a long time looking at the efficacy and the safety data. We believe as we have always that this drug approvable. The data looks good. The safety and the efficacy data looks good but we will have o do a reanalysis of that. Regarding the hand wash study, we're going to try and run that, that's probably the rate limiting step and we're going to run to complete that as soon as we can. Regarding both of these we remain very committed to them and very excited about them as we have spoken about, they provide broad range of optionality where the replacement is needed and we think there's considerable need for that.

First, Alan, can you talk at least conceptually about SG&A and R&D for next year, not specifically but conceptually do those need to change much in the absence of any new business development or licensing and for Dave, what are your most business development priorities right now?

With regard to financial guidance for 2010, we'll have a more complete discussion of that in the first quarter, but just to a more qualitative conception actual consideration, we are focused on operating efficiency in the SG&A space and in R&D. With respect to SG&A, we have a pretty flexible cost structure. That includes field reps as well as a contract sales organization and we have the ability to dial that up or down based on the activity and needs of our business.

To the extent that we have any excess capacity currently our expectation would be that new business opportunities would utilize that capacity as we move into 2010. R&D is becoming a bigger piece of our cost model and so I think that as you look at operating expenses, you'll continue to see us shift the mix with R&D taking a growing percentage and SG&A a relatively smaller percentage of an overall rising pie with respect to operating expenses. We think bringing new products to market is a key component to our success and as Ivan articulated we have restocked our pipeline with products and registration Phase III and Phase II B over a short period of time so it's natural to expect that we will continue to advance expenditures behind those programs next year.

And I think the other part of your question was how do we look going forward in the business development. The strategies that we've laid out from the, of this transformation of Endo was to have a set of solution based products that would start to meet the economic drivers that we certainly read more about today in healthcare. To that end, as we've expanded with the pain franchise being certainly a lead in our business and now with the oncology, endocrinology, urology, we really are looking to address more of those with products, some of which you have seen in terms of what I'll call mid stage development, but the focus right now is to be able to blend in more revenue generating products in the near term.

I think anywhere we can gain these revenue synergies and how to leverage our sales position, that's our first choice. The avenues of growth that we see, that we've already put into place with the new products either launched and/or about to launch along with additional opportunities that we can build off of, the architecture that we put into place puts us in good position for both the ability to license in because we are a preferred player with the architecture and the infrastructure we have as well as again looking forward into how we continue to have sustainable growth in 2010 and beyond.

Thanks.

Thanks, Gregg, can we go to the next question.

Your next question comes from the line of John Boris with Citigroup Global Markets. Please proceed.

Thanks for taking the questions. The first one building on Greg's on business development, Dave, obviously you've outlined oncology and endocrinology and the FORTESTA and licensing. How are you thinking about the end licensing and/or business development across those three areas and in particular also the drug development technology that you have. You've always highlighted that as an important delivery tool or delivery device and how can you shed some light on how you might be able to maximize that? Second question has to do with your acetaminophen containing product. I'm just wondering if there's been also, any regulatory action or can you provide any insight into any regulatory action that you think that the FDA might take on higher dose or higher strength acetaminophen containing product and then I have one follow up for Alan.

Yes. Let me take on the business development extension. I think the notable and where we have the greatest opportunity for revenue synergies is in the pain franchise and so from that standpoint, we look very keenly at building and bringing more products against that particular franchise. I think the success that we've had with specialist and we continue to want to drive ourselves into more of that category where there is a greater interface both physician and patient, and so in the other that we opened up through the Vgel is an example of areas in pain that we think we can further expand on. Notable, we talked about the urologist, bladder cancer and certainly the treatment of a prostate where we have a small foot hold with the Vantis equally gives us an area where we can use that infrastructure and expand it out.

I think the elements, when you talk about the delivery technology, the hydron, the excitement there is that it's been successful certainly with Vantis and Sarpelin, Ivan already highlighted we are moving ahead with our (inaudible). We think that the expansion of that technology lends a lot to the cost equation of cost containment, meaning that the patients get better compliance with an implant. Also to that end, we feel that the second generation of that technology, we are moving ahead with. It was certainly a part of our acquisition not fully expanded but we have expanded the development in that area, and we hope that that coupled with our formulation expertise in our generics business we will be able to move forward with adding more drugs to the hydron and the second generation.

So all coupled I think when we look at the diversity of the business and the discipline to the strategy, we are tuning it effectively to play to where we can get revenues off the sales force, where we have foot holds in this new expanded foothold of our business and then leveraging the generics business on its own right which by the way to their credit, we've added now additional NADA. We'll have a total of six ANDAs filed in that franchise this year. So we are blending a lot of the diversity and staying focused to the strategy and it really all leads to a number of very unique targets that we can go after in business development. Ivan.

Thanks, Dave. I'd like to add on the hydron. I agree with what you said. We have teams who are very actively looking into new applications for the hydron technology in particular the second generation. The second generation will give us an even broader potential application for the technology and clearly it's relevant that we have low bioavailability drugs, we have drugs with poor compliance, drugs where you want constant levels delivered over a prolong period of time.

The other question I think was on our combination of acetaminophen drugs and as we said previously, clearly it is absolutely critical that patients who are suffering from cute and chronic pain do have access to safe and effective pain management therapies. We absolutely believe our product will have a strong benefit value to patients and healthcare providers but clearly we are very much committed to working with FDA to ensure that these products have prescribed in the best interest of patients. It's worth noting a few years back we actually introduced lower dose tablets that contained 325 milligrams of acetaminophen. And finally we have been working with many people surrounding this issue and we have put a comprehensive piece in the docket and certainly we've been working closely with third parties in this field.

Ivan, any idea of the timing of when the FDA may give a ruling on that. And then just one question for Alan can you disclose what free cash flow was in the quarter?

I don't think we have a good idea. This is a complex problem. It's been a massive amount of stuff entered into the docket. Clearly I think it's an issue where both healthcare providers and patients and advocacy groups feel that these products provide tremendous benefits to patients.

On your question, John, with regard to cash flow, cash flow from operations for the quarter was approximately $218 million.

Thanks.

Can we go to the next question.

Your next question comes from the line of Rich Silver with Barclays Capital.

Thanks. Just going back to the questions around spending, so if I heard clearly, the fourth quarter spending both in terms of R&D and SG&A we should expect those to be higher than the third quarter. Is that correct?

I think we had indicated that we expected to see an acceleration, we expected to see an acceleration of spending over the second half of the year. Certainly we've seen that in SG&A and I would expect that trend to continue. With regard to R&D, we have already seen a pretty significant uptick from the second quarter in R&D and I would expect it to be broadly in line with that level.

Okay. And then back to 2010, which I know you'd like to wait until you report the fourth quarter, but can you at least say whether the levels in absolute levels would be, is there any possibility the levels would actually be the lower on a quarterly basis than what we are seeing right now given that you are about to launch a new product?

Well, frankly, we think we are well positioned for a strong 2010. The core business is performing extremely well this year and is generating good revenue growth, it's generating good cash flow and we expect to see those trends continue as we move into 2010. With respect to business development activity, we've talk a little bit about that on the call today. I think the important thing to remember is that we have a strong balance sheet with the financial resources necessary to continue to build a diversified Company, and we'll continue to supplement our organic growth with business development activities over 2010 as well. We have core capabilities in terms of people and a broad pipeline that is performing very well. We've successfully integrated the Indevus transaction without a hitch this year. I'd say the only wild card that might be out there is around healthcare reform and what that might imply. That is a pretty fluid situation but even there undoubtedly we are moving to a more payor centric world and our experience this year is that the kind of capabilities we have put in place in our commercial organization enable us to pull thorugh drugs pursuant to effective contracting strategies. So all told I'm pretty optimistic as we turn to 2010 and we'll provide more detailed guidance in the first quarter.

One last one regarding the launch, if you do receive a full approval on December 2, or before, will you actually launch in December or might it be worth waiting until after the holidays?

Again we'll start looking at that right now, and I would say we would probably see ourselves move as I indicated earlier with our specialty force sooner rather than later in terms of getting the product initiated there. But with a broader full launch in the first part of the year or in the new year, and that's the way it's laid out at this point.

And one other comment on that Rich is that traditionally the way our business model works is initially when we load inventories into the trade there usually is a delay in our recognizing revenues. Even if we have a soft launch in December of this year it is very unlikely that you would see revenues until 2010.

Okay. Thank you very much.

Thanks.

Your next question comes from the line of Ian Sanderson with Cowen & Company.

Good morning. A couple of financial questions. First on the increase in the tax rate, you mentioned that that had something to do with the increase in promotional support activities and I wanted to tie that together. Secondly, the $20 million gain on the change in value contingency payment to Indevus, does that mean that your absolute payment comes down from $180 million or is that just a present value calculation of what that is worth? And then on the R&D side, any update on when we might get Phase II data on Exomodol and I think that is it.

Okay. Well, Ian, with regard to the increase in the effective tax rate, that's really a state tax driven consideration. As we've optimized our promotional model, we have put more resources in the field locations to work hand and glove with our field representatives that creates a greater nexus of activity in handful of individual states. So as a result of that there is a a higher tax liability associated with that. We think it makes sense to do that given the efficiencies we are trying to create within our commercial infrastructure. We've been very focused on careful customer segmentation and optimizing the mix of resources that we put in each geography as we look to optimize the synergies that come from our contracting efforts. With respect to the $20 million gain related to the Avide contingent consideration, that's a pretty complex area where you have got the interplay of purchase accounting coupled with fair value accounting, and we have a liability on our balance sheet for the expected payment to Indevus shareholders upon the expected approval of Avide. Each quarter we need to step back and look at the sales forecast, the likelihood of approval, the label we are likely to achieve, and as we model all of those through, we adjusted our contingent liability accordingly.

From a cash perspective though it would still be $180 million upon approval; is that correct?

That is correct. The maximum payment is $175 million upon approval.

There was a question on the Exomadol program. This is, we are about to initiate with our partners two Phase II B programs in chronic pain conditions that should run through 2011 and I would hope that we have results in early -- sorry, run through 2010 and I hope we'll have results in early 2011. I mean, as we said previously we believe Exomadol has potential benefit from a safety and/or efficacy standpoint as well as from a scheduling standpoint and it is important that we design some of those components into the Phase II B study in order to ensure that we get a good read of that when we get the results in 2011.

If I could follow up on one thing, do you have any update on the Opana ER192 patents prosecution status? Is that appeal ghat's going to be heard this quarter?

Yes, we do. We have appealed the recent rejection of the 192 patent, and we are not certain whether it would be heard this quarter or earlier next year.

Okay. Thank you.

Your next question comes from the line of Shibani Malhotra with Goldman Sachs.

Thanks for taking my question, a couple of questions. First, can you comment on I guess realized pricing and formula coverage trends for Lidoderm and then secondly, on Avide, assuming you launch at the end of this year or early next year, you probably won't get a Jayco until 2011. I guess what does your market research say about how this would impact uptick of the product if you can just take us through that?

Well, I think -- I'll let Alan pick up on some of the financials on the first part of your question, but let me say that the launch relative to Jayco you get an initial a generic Jayco you can launch under and at this point I don't see any interference from that standpoint. As I've said, the advantage we really feel in the launch is the specialist force that we have targeted in that urology sector, and that coupled then with the primary care. So the people on the ground, the infrastructure set, Jayco not being the issue, I just don't see any impediments relative to our ability to bring this product out and bringing it out in a way that has the substance both on the medical clinical as well as the health economics which we've outlined as a major strength of the Company. But on your financial question, Alan?

So with respect to formulary coverage, we enjoy broad access in both the managed care contracts as well as the Part D contracts. More than 90% of contracted lives have coverage for Lidoderm and on the Part D is almost 80%. That kind of broad formulary coverage is particularly helpful to us as we look to optimize our Lidoderm franchise. We have gone through our 2010 contracting for Lidoderm, and we expect that contracted coverage to remain the same as we move into 2010. With regard to Avide, we expect that we would use a temporary Jayco when we come to market in that regard, we do not expect that that would have any impact on the uptick in sales and use associated with the product and part and parcel of our business model contemplates reimbursement specialists who will be working with patients and physicians to optimize reimbursement.

A quick clarification. In terms of Lidoderm then, should we be modeling stable price going forward?

I think what you have generally seen this year is modest volume decreases offset by modest price increases. I think that is a pretty stable situation, and without getting into too much specifics I think that is a reasonable set of assumptions as we think about the brand for the fourth quarter and beyond.

Great. Thanks.

Thanks.

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

This is Andrew Finkelstein on for Gary. On Avide if you could remind us in your discussions with the FDA on the label whether you have gotten any better since of the possibility of a black box warning and how that potentially affects the contingent consideration from the Indevus deal?

We continue to work with the FDA. They continue to review the data that we previously submitted to them. Our feeling as we say, we obviously believe it's approvable and our feeling is it more likely that it will not have a black box.

And obviously with respect to contingent contribution, that consideration has an approvability component. It has a box warning or no box warning consideration and it has a sales forecast consideration around it. But as Ivan has indicated our best thinking at this point in time is that it's more likely than not that we will not have a back block.

I would say again the RIMs program as was mentioned earlier in Ivan's comment with the experience base we have in rim management of rims, we feel again we've positioned both the product and our capabilities to manage RIMs in a positive light. So at this point we feel we've addressed all of the outstanding issues.

Perfect. Thanks.

Thanks.

Your next question comes from the line of David Buck with Buckingham Research Group.

First, on the guidance for this year and just looking at next year, are you assuming any approvals on the generic side? Secondly, can you talk a little bit about sales force resources, where they are now and with Lidoderm, it was obviously flat for the quarter. Again you talked a little bit about modest growth would be your expectation for next year but what is your thought in terms of resources behind Lidoderm as this product matures? Is there an opportunity to reduce the sales force asset of the Company? And also for Alan can you talk a little bit just the -- I think the messaging had been that you are going to be spending on business development roughly $300 million or so and potential for acquisitions I want to confirm if that is in fact the target?

Relative to the overall resource and how we look at resource from our sales, as I've indicated before, we want to bring more products up against that capacity, and we do feel that we are adequately resourced from that standpoint. I think -- what was the second part of the question was really more directed on the financial side.

One other observation with regard to resources. We do have a flexible resource base, and so we believe we have the ability to dial resources up and down as needed very indicative of that was our decision earlier this year to dial down the contract sales force associated with the promotion of Lidoderm. We took that from about 235 reps to about 80 reps, and that is reflective of our desire to be nimble in how we reallocate resources dynamically across the product line.

As we plan for the launch of Avide next year as we planned for VALSTARs launch in September, we reallocated resources from our pain franchise to our UEO franchise and I think you continue to see us look to optimize efficiencies across our sales force in that regard. Frankly we'd like to find more products in order to optimize those resources rather than thinking about pulling back on promotional expenditures, and that is part and parcel of our business development activities.

I don't believe we put a hard target out in terms of dollars that we would spend on business development. We have indicated that we think the free cash flow of cash flow from operations for the Company should be available to further diversify our top line. It still remains our focus to bring in products with market revenues to do that even more quickly as well as late stage opportunities in the pipeline as we see a nice fit. But you'll also see us continue to draw down on our cash position and utilize our balance sheet to effect in that regard.

Lidoderm is a product that has great legs, tremendous opportunity. We think there are a number of drivers that could generate continued growth in the brand. Certainly aging demographics argue that we should see incremental growth from the product. With the improvement in the economy, we are likely to see some incremental use of add on therapy, Lidoderm is often use as adjunctive therapy with one or other pain agents and so we think that there's probably opportunities there as the economy continues to improve and frankly we've done some further reallocation of our sales force efforts earlier this year to further enhance the targeting to physicians who prescribe for PHN and we would expect that that would continue. We are also exploring other channels to promote the product, and so we think that there's a lot of opportunity.

I would say again Lidoderm I feel very good about how we've also to an earlier point about the contracting and the managed care. Your other comment or question was around the generics business and again it's becoming a more valued player as we've all seen relative to the healthcare equation. But right now Endo has 12 ANDAs awaiting review under the FDA. We added to that 12 or a total of 12, we put six additionally this year. We do expect some recognition or revenue in 2010, and we currently have in excess of 20 development projects. So that the investment if you would in that particular area, we think is going to be a contributor to growth as we go forward and again with those ANDAs pending and some recognition in '10.

Just to follow up on that, Dave, do you expect generics to grow net of pricing?

I do. I think the opportunity of the generics arm coupled with the leverage of that competency up against the high drawn or the implant is going to be a growth arm for Endo. Yes.

We see generics component as an important consideration in our strategy going forward and the opportunity to create synergies between our branded and generics arm is part of how we think responding to a dynamic health care environment.

Thank you.

Your next question comes from the line of Marc Goodman with UBS.

My first question is can you talk about FORTESTA and what the book is, what is the key advantage to take share of that market? Second of all, on Voltaren Gel, can you help us the pricing per script type thought process since there's so much going on there? And then third, were there any inventory changes that were of any significance for any of the products? I know you mentioned Lidoderm already.

Relative to FORTESTA, what we see is that the advantage FORTESTA brings with a higher concentration of smaller amount has to be applied. Again minimizing the transfer area and the way they use the application of dose or the metric of dose I think is an advantage that can be applied rather than on the torso, on the inner thighs minimizing effectiveness or issues of transfer. It is for us, the next stage in a topical. It also gives us the ability to get that revenue synergy that we talk about with the long acting along with the gel, having diversity of product and again between the unique aspects of the gel along with the complementary aspects of long acting gives us the advantages and not just pushing into the market just another gel. We are looking for some unique features and we think we have that.

When you do your market research do you hear complaints back about that as an issue and so this is a real key advantage?

I think we do feel some products have noticeable smell. Some have the extent of application and the awkwardness of how you have to apply it. So, yes. This is the next generation and I think it fits with what we are trying to bring into the market.

So Mark, with regard to your other questions on inventory changes from the second quarter, we really have not seen much of inventory change a day here or there in trade inventory levels but nothing that is significant. With regard to Voltaren Gel, that is a really attractive growth opportunity for us. What we particularly like about it is the ability to establish a beach head in the specialty area of osteoarthritis in the pain space. it's very consistent with our desire to build out in specialty in urology and endocrinology and orient more of our business toward specialty versus managed care as we shift that mix. We are seeing growing TRX and new scripts in the space and that is in part driven by effective contracting strategies, and we expect growing coverage as we continue to commercialize the brand and obviously as we bring more covered lives into the fold, we would expect to see some shift in pricing per script associated with that.

Thanks Marc. Can we go to the next question.

Your next question comes from the line from David Amsellem with Piper Jaffray.

Sure. Thanks for taking the question. Just coming back to FORTESTA and looking at the overall gel portion of the market, how do you envision peak market share for the product? And then secondly, would it be reasonable to assume that pricing for FORTESTA would be similar to what you see for (inaudible) gel?

We are working through the pricing. Other than getting some of our market research tied up, I think the other area on your peak sales is another one where we are looking a lot going forward for all of our products on contracting and in the managed care scenario, we think that is going to play a lot of what we want to be able to move into this market with a complete product and share growth. So from the standpoint of how we look at managed care, how we look at our application into the market, meaning application in terms of sales with our specialty and primary and the complementary pricing all of which at this point for a lot of reasons we won't get into details in this call but we have our hands on the levers that will give us what we want to see is share growth.

And I think with regard to testosterone replacement therapy, we think there's a franchise opportunity here between the long acting injectable DELATESTRYL which is our short acting injectable and then FORTESTA, the differentiated gel in the marketplace. And so we believe that there are a range of products that we can offer specialists and then ultimately primary care in this space and that we can be more effective as a result of that, and I think part and parcel of how we think about market strategy will reflect that.

Can we go to the next question?

Your next question comes from the line of [Oren Niblett] with Jefferies.

Thanks for taking the question. Was curious just how the search for a new COO is going and maybe more specifically whether that would affect the refinement of your potential Avide launch plans? I don't know if a person potentially coming in would have different ideas than what you have on the table now and how that affects the timing of the launch as well?

First of all, the search is going well. I would say that with some of the contraction in the industry, we have gotten a lot of good candidates. That along with the health of our business and the way we are going through our own transformation, those have worked well with certain candidates. When we look at what clearly is an advantage for us is the breadth that we are trying to bring to the market and elements of operational excellence as we look forward in terms of both acquiring in licensing and acquisition, operational excellence and integration are critical skills that we look at. So when you ask the question about the Avide launch of the business, managers we have also brought in in the last year, they have a handle on that and I don't foresee any disruption on Avide. What we are really looking for is a skill set that is gong to give us the opportunity to be efficient in growing our business and adding new dimensions to the business. We have time for one more question.

Your next question comes from the line of Elliot Wilbur with Needham & Company.

Thank you. A couple of clean up questions. Is there any update you can provide us on the ongoing patent allegation around Opana ER in terms of upcoming events in the actual litigation process?

So with respect to Opana ER, we continue to pursue a range of options including the possibility of additional patents. We'll continue to defend our patent position. There really is no new news to report in that area this quarter.

Okay. There had been a trial scheduled. I don't know if that's been changed as of this date or if that's still scheduled to occur later this year?

The pretrial conference is scheduled for March of 2010. That is the next milestone at the pretrial conference at that point we would probably have further information. That is the only thing scheduled at this point in time.

Got it. And then just in terms of what's, when are we likely to get the next data point on (inaudible) in acromegaly and remind me are you still exploring usage of that product in GI tumors?

Yes. I'll take the second one first which is this carcinoid syndrome. We've actually just initiated Phase II studies in carcinoid syndrome. That is a small Phase II study. Regarding, acromegaly, yes, the studies recruiting very well, and we would hope to have results mid 2010 with potentially the success we are looking to make a file in late 2010, early 2011.

Last question. Supprela LA I realize it's a small product but looks certainly the commercial performance to date has been better than expected and I had always thought this was a small market around $80 million. Either you are gaining a lot more share there than we had previously expected or maybe the market opportunity is just quite a bit better than what we had originally expected. Maybe color commentary around the dynamics there?

I think we are seeing some market share gains in the product. It's reflective of our ability to differentiate the product more especially within its niche in the marketplace. I think also in the case of Supprela it's very much indicative of our ability to take a transaction like Indevus and integrate it into our core operations and not miss a beat as we continue our commercial orientation.

I think t speaks to the hydron technology. We are seeing that in some development programs. The clinicians using it they see the benefits of it, and that's why we are so enthusiastic about taking it into different treatment areas.

It's better diagnosed and it looks like it's increasing issue and it can't be managed through this process, so we think we are in the right place.

At this time I would like to turn the call over back to Mr. David Holveck for closing remarks.

I want to thank everybody who participate and came in on the call. I hope you start to see again the strategy that we unfold at the transformation of Endo building on its pain franchise, but importantly diversifying, adding competency and breadth both in all areas of the business but notable certainly in the R&D with the pipeline expansion. We think we are poised to obviously close out this year very positively relative to the guidance we put forth. More importantly, I think the position as we go forward and the goal of sustainable growth in business is being reinforced and that reinforcement is relative to the steps we've taken, competency wise and licensing but also the building of a robust balance sheet that gives us even more fire power to add to it along with the contribution of R&D. So with that, I think we are in step with our plan. We are focused discipline to the plan and the strategy, and the last item I would just say as a resident of Pennsylvania, go I Phillies, and we'll just close it out on that.

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