Endo International PLC (ENDP) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2009 Endo Pharmaceutical earnings conference call. At this time, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's call, Blaine Davis, Vice President of Corporate Affairs. You may proceed.

Good morning everyone, and thanks for joining us. With me on today's call are David Holveck, President and CEO of Endo, and Alan Levin, Executive Vice President and Chief Financial Officer. After our prepared remarks we'll open the call to your questions which Ivan Gurgel, our head of R&D, and Caroline Manogue, our Chief Legal Officer, 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 the call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may 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 this earning's 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.

Thank, Blaine. 2009 was a positive first step in transitioning Endo for sustainable growth. We had record revenues and earnings. We expanded our therapeutic focus beyond pain management into urology and oncology. We acquired new drug delivery technology and important new products. We launched VALSTAR, the new drug for bladder cancer. And we streamlined our organization to make it more efficient. We committed our Company to growth through a combination of internal R&D, collaborations with leading academic institutions and pharmaceutical companies, improved commercialization efforts for our current product line and new products or Company acquisitions.

The numbers reflect the strong performance of our team and our core business which continued to generate solid returns. Fourth quarter revenues were up 13% over 2008 while revenues for the year were up an impressive 16% over 2008. In the face of growing competition and a challenging economic and healthcare environment, our products and organizations overall did exceptionally well in 2009. In particular, the Opana franchise had a great year growing 28% compared with 2008. SUPPRELIN LA also continued to deliver impressive market share gains exiting the year with 35% of the market for central precocious puberty up from just under 20% in 2008. Our strong performance exiting 2009 is also reflected in our strong 2010 revenue guidance which we highlighted in this morning' s press release. We expect revenue in 2010 to be between $1.55 billion and $1.60 billion, a range which is above market expectations. Alan will say more about our operating results and forecasts in a moment.

We have a strong engine to drive the expansion of our business and I'd like to focus the rest of my comments today on our plans for growth. When I spoke at our national sales meeting two weeks ago, I reminded our sales reps that Endo's strategy for growth is not just about selling more products or acquiring more products to sell. It's also about finding new pathways to help our customers. By pathways, I mean identifying gaps in patient care and offering new solutions to patients, physicians, and payers. And for Endo, growth is in the gaps. The place where patient need & Company opportunities intersect. Our strategy and the improvements we're making to our commercial model, including the targeted use of personal selling, balanced with the expanded use of non-personal promotion, are producing positive results, and they will become more meaningful to our bottom line over time.

Our focus on business development remains intense. My colleagues and I are continuing to evaluate new compounds, new products, and new technologies to acquire. While the pace of this activity is not always under our control, an often depends on other parties, I'm confident that we will sign multiple deals this year to enhance our near term revenues and add new development projects to our pipeline. Our strong revenue stream gives us the financial strength and flexibility to pursue new product acquisitions in best in R&D and build a strong growth company. Our financial strength also gives us the ability to maintain our flexible sales for structure and to adapt to changing market conditions.

In the meantime, we will continue to execute our sales and marketing plans to build on our record of double digit revenues and earnings growth. While the recent generic challenge to Lidoderm had always been a possibility, we continue to invest behind the product to support its growth in the PHN market. At the same time, we are also moving ahead with aggressive response to Watson's Laboratory's ANDA, including the lawsuit we filed on February 19th alleging infringement of Lidoderm's patent. I can tell you that we are confident in Lidoderm's IP position and will defend its strong patent estate vigorously. In addition to our legal events, we believe there remains significant regulatory and scientific hurdles for a generic Lidoderm to be approved, an issue we highlighted in our Citizen's Petition filed with the FDA in 2006. To insure the safe and effective equivalence of any generic version of Lidoderm, we believe that FDA must return to its established standard of requiring clinical end point bioequivalence studies.

We're also committed to our registration plans for Aveed and Fortesta. We've developed a proposal for Aveed that we will discuss with the FDA during the first half of this year. These discussions will begin to assist us in determining the best pathways to approval for Aveed. Re-analyzing the Fortesta data to complete our response to the Agency's review of our NDA and post-marketing recommendations for that product. We continue to expect the complete response for Fortesta to be filed in the middle of this year. I believe both products could eventually be approved and we continue to be excited about the market opportunities for these products and the potential to address the needs of these patients with multiple therapeutic options.

We closed out 2009 exceptionally well and we're off to a strong start in 2010 and excited about the possibilities that lie ahead for the organization. We are very focused on expanding and accelerating our growth that will generate positive returns for our shareholders.

And now Alan will provide financial guidance for 2010 and review our financial results for the fourth quarter and full year of 2009. Alan?

Thank you, Dave. I'd like to start this morning with our 2010 financial guidance. Our core business continues to perform extremely well, and we believe that Endo will deliver 2010 total revenues between $1.55 billion and $1.60 billion. This revenue guidance range reflects a number of assumptions. Importantly, we assume that we will retain exclusivity for Opana Immediate Release during the first half of the year recognizing that a generic competitor could enter the market with very little advanced notice. Opana Immediate Release had sales of nearly $60 million last year.

On the expense side, we continue to exercise financial discipline in the investments that we are making to commercialize our products and move new compounds through our pipeline. On an adjusted income basis, in each of the last two years, we successfully achieved year-over-year reductions in operating expenses, the combination of SG&A and R&D expenditures, as a percentage of revenues. We expect further margin improvement this year. Operating expenses will be broadly comparable to 2009 in the aggregate as we leverage top line growth for even greater year-over-year growth at the bottom line. We remain focused on driving sustainable growth, and R&D expenses are expected to increase as we continue to invest in clinical development programs to advance our late stage development compounds as well as earlier stage third party collaboration agreements.

Advancing the development of Axomadol and Urocidin will require an increased level of investment versus 2009, although R&D will remain relatively stable as a percentage of revenues. In the case of Urocidin, we recently exercised our option to pursue global rights to this compound which may result in our funding an increased level of development costs this year.

We will continue to provide appropriate promotional support behind our key products. Our commercial infrastructure is flexible with a high variable cost component that allows us to dial investments up or down in response to evolving business conditions and opportunities. We expect SG&A as a percentage of revenues to decline in 2010 relative to 2009 reflecting new approaches to customer segmentation and marketing as well as the annualized effects of last year's restructuring efforts. On an adjusted basis, however, gross margin will be under pressure, reflecting changes in product mix and increased royalty rate on sales of Opana ER, and higher manufacturing costs coupled with the adverse impact of foreign exchange for Lidoderm. As a result of these changes, at current exchange rates, gross margin is expected to decline two to three percentage points as a percentage of revenues this year. We expect our adjusted effective tax rate to remain relatively flat this year at approximately 33%, sustaining the reduction achieved in 2009 as a result of incremental tax efficiencies relating to the acquisition of Indevus coupled with a reduction in certain state income tax liabilities.

Finally, the Company will resume share repurchases in 2010 pursuant to our current stock buyback authorization. The magnitude of these purchases will be determined in part by the scope and pace of business development activity this year. Taking all of this into consideration, at current exchange rates, we estimate adjusted diluted earnings per share in a range of $3.15 to $3.20 this year, reported or GAAP diluted earnings per share is expected to be within a range of $2.40 to $2.45 this year. The reconciliation of projected reported diluted earnings per share to adjusted diluted earnings per share is available in the earnings press release we issued this morning.

That's our view of 2010 at this time. As Dave stated, we believe we will be more active in business development this year to generate transactions that will be incremental to the growth story I've just outlined. Our core business just completed a record year so let me review the fourth quarter results which drove the strong performance. For the fourth quarter of 2009, we had total revenue of $391 million up 13% over the fourth quarter of 2008. Lidoderm had another solid quarter with revenues of $204 million comparable to the fourth quarter of last year. Full year Lidoderm revenues were $764 million representing 52% of our total revenues, down from 61% in 2008 consistent with our goal of diversifying our top line. We expect low single digit growth for this franchise in 2010 reflecting favorable patient demographics and the impact of new promotional strategies.

Opana ER and Voltaren saw strong sales growth reflecting the impact of our contracting strategies and a promotional campaign that educated patients and resulted in strong script growth among previously prescribing physicians. SUPPRELIN LA also performed well, as did our generics business which grew 21% versus fourth quarter 2008. We continue to be pleased with the launch of VALSTAR, as the only approved therapy for its indication. This product has provided patients and physicians with an important option for improving the treatment of patients with BCG refractory carcinoma of the bladder.

Total reported operating expenses for the quarter were $128 million. However on an adjusted basis, selling, general and administrative expenses were $145 million and R&D expenses were $33 million. Fourth quarter adjusted net income was $95 million up 11% over $86 million during the fourth quarter of 2008. Our reported diluted earnings per share increased to $1.25 versus $0.62 in the fourth quarter of 2008. On an adjusted basis, adjusted diluted EPS increased 9% to $0.81 versus $0.74 in the fourth quarter of 2008.

As I mentioned a moment ago, the fourth quarter of 2009 benefited from a significant reduction in our full year effective tax rate resulting from incremental tax efficiencies relating to the acquisition of Indevus coupled with the reduction in certain state income tax liabilities pursuant to a fourth quarter change in tax law. The net impact of tax related items improved full year 2009 earnings by $0.11 per share. Most of these incremental tax savings will be retained in 2010 and beyond.

Reported or GAAP earnings reflect a net pre-tax credit of $60 million related to purchase accounting considerations associated with our development product Aveed, an injectable testosterone product. Under new purchase accounting rules that took effect last year, we are required to capitalize the value of pipeline compounds acquired in an acquisition and to test the values of these assets for impairment under certain conditions. In December, we received a complete response letter from the FDA with respect to our NDA for Aveed, which triggered a review for asset impairment. Significant regulatory uncertainty currently exists with respect to the timing, label, and regulatory path forward for this compound. While we believe that Aveed could ultimately be approved and commercialized in the US, we recorded a $65 million non-cash impairment charge in accordance with GAAP reflecting these uncertainties. Offsetting this charge is a credit of $125 million reflecting a reduction in the liability on our balance sheet associated with contingent consideration payable to former Indevus shareholders in the event that the product is approved the FDA within the next two years. This credit reflects the decreased probability of our having to make this payment during the remaining specified contractual time frame.

Overall, we had a very solid quarter with our base business continuing to generate an attractive level of free cash flow which helps to finance our business development activities, thereby further diversifying our business.

That concludes my prepared remarks and now I'll turn the call over to Blaine.

Thanks, Alan. This concludes our prepared remarks. We would like to now open the call for your questions.

(Operator Instructions). Our first question is from the line of Gregory Gilbert with Banc of America. Please proceed.

Thanks, first a couple for Alan. How much is authorized in your share repurchase program and what is specifically factored into your 2010 EPS goal in terms of share repurchase?

We have a $750 million share repurchase authorization, Gregg, as part of our stock buyback. We purchased about $425 million against that so far. We've not specifically cited the amount of share repurchase activity in 2010. Our expectation, though, is that the pace of that will be dependent in part upon the pace and scope of business development activity that we execute.

On operating expenses, you mentioned they would in aggregate be similar this year to last year so SG&A has to obviously come down a bit from Q4 levels. Should we think about any lumpiness over the quarters on OpEx or pretty flattish over the course of the year?

I think that SG&A and R&D in total will be broadly comparable. We certainly think about R&D expenses going up year-over-year. For SG&A, again, I think our new promotional strategies are bearing a lot of fruit. We're getting good traction on that. We expect SG&A as a percentage of revenues to decline and we could see some phasing of SG&A and R&D over the course of the year. I don't think anything that would be too dramatic but nevertheless we don't intend to provide quarterly guidance on those lines.

And then one more before I jump back in. Lidoderm, any new discussions with the Agency post their acceptance of Watson's filing?

No, but as you all know, there was a Paragraph 4 received from Watson on Lidoderm in January of 2010. And it's important to note that because of Lidoderm's success and because of the importance of Lidoderm to Endo, we've been expecting and preparing for a Paragraph 4 for quite some time, so we were not surprised or caught off guard when we received Watson's notice in January. We did sue Watson on Friday. We, together with Lidoderm, with Teikoku, our partner on Lidoderm, and we are confident in Lidoderm's IP and will defend its strong patent estate vigorously. We also end licensed the (inaudible) patents to bolster IP estate around Lidoderm. And as part of our overall strategy to protect this important brand we intend to use these patents to protect Lidoderm and will enforce them against any infringers. Finally, we do intend to pursue all available regulatory pathways in defense of Lidoderm alongside of our legal strategy to protect this important franchise. I'll turn it to Ivan to talk a bit about our regulatory and scientific strategies.

Gregg, thanks for the question. As you know, we firmly believe from a regulatory standpoint that someone would need to undertake clinical studies, clinical equivalence for the safety and efficacy studies to get an ANDA approved. We raise these issues and other flaws in FDA's approach with the Agency and this would of course include now the Citizen's Petition. I think what's worthwhile noting, a couple of events in recent weeks in fact, there was a statement made last week by the FDA Commissioner Margaret Hamburg at the Generic Pharmaceutical Manufacturers Association, and she emphasized the need for research to ensure that difficult bioequivalence decisions are evidence-based and science driven And another thing, in the February 2010 issue of the American Association of Pharmaceutical Scientists news magazine, the FDA made a statement that the PK, pharmacokinetic approach, however, could not be used for locally acting drug products since their plasma concentrations may not reflect the drug availability at the site of action. And clearly, that's entirely consistent with Endo's longstanding position.

And I would just add from a financial perspective, in 2009 we saw very solid performance for Lidoderm. As I mentioned earlier, in 2010 we expect low single digit growth for the franchise. We have seen script growth quarter on quarter sequentially over the last two quarters which gives us confidence in the future. We have support programs to pharmacies that are improving the persistence of Lidoderm therapy, robust formulary access, and improved targeting and other changes in our promotional mix which include new approaches to customer segmentation, personal as well as non-personal promotional efforts. So all told, I think we're pretty bullish on our prospects over the short and long term for this franchise and it will remain a key contributor to Endo for some time to come.

Thanks.

Can we go to the next question please?

Your next question comes from the line of Annabel Samimy from Thomas Weisel Partners. Please proceed.

Hi, thanks for taking my call. Obviously, with the impairment charge and the reversal of the liability it sends a pretty strong signal that there is obviously significant uncertainty around Aveed. And then you made some comments that you still feel that it could get approved so can you reconcile that for us a little bit? And also if indeed Aveed doesn't get approved and you end up dropping the program, what does that do for your Fortesta opportunity and your committment to endocrinology/urology?

I think there's a lot of complexity in the financial reporting charges that are associated for Aveed in the fourth quarter of this year. First, I think it's important to note that the asset impairment charge is really a reflection of accounting rules that changed last year and now require in a new business combination for us to essentially capitalize the value of in process R&D and review it for impairment. There were two components to the net charges. One was the credit to which you refer, Annabel, and then the second the impairment charge itself. The liability is a complex calculation and it's based on a number of assumptions with regard to the patient population and the indication thereof, the time to approval, possibility of additional clinical work, and then obviously the heightened uncertainty with regard to the regulatory pathway going forward. We expect to open the dialogue with the FDA on these matters later this year and we'll expect to know a lot more coming out of that. Reflecting all of that uncertainty, we did take a charge of $65 million this quarter.

The contingent payment is part of an effective deal structure on the Indevus transaction that's allowed us to essentially shift some of the risk of approval to former Indevus shareholders associated with this transaction. Clearly, the credit in our P&L indicates a reduced likelihood in our view of the product coming to market within the next two years. However, we still believe that this is a product that could come to market and we'll be working with the FDA in that regard.

I'll ask Ivan if he wants to say anything more about that.

Yes, thanks Alan. And consistent with what you just said, we remain very much committed to Aveed and also excited by Aveed. You may recall, we see it as the next generation of testosterone therapy. It is approved in over 80 countries and marketed in over 50 already and we believe it's got the potential to satisfy considerable unmet medical needs by providing constant levels of testosterone over a prolonged period of time following just a single injection. Also, as it's given in the doctor's office, it will provide a way to insure both compliance and provide oversight in the prescribing of the schedule three substance. This will obviously be assisted by REMS Program and we certainly feel that we have the right sort of experience to structure an appropriate REMS Program given our experience with other controlled substances. And finally, there's some good news on the patent side and I'll hand it over to Caroline who can provide a little bit of information on that.

The good news is that a US patent was recently allowed that covers the formulation of Aveed. This patent will issue in the next month or so and will expire in 2025.

So we certainly believe that we will continue to enjoy exclusivity on this product assuming we successfully bring it to market for some time to come. With respect to Fortesta, we view that as an attractive product in its own right and we believe that we have the commercial capabilities to move forward with that product and that it would be synergistic with our urology/endocrinology franchise and so we are certainly excited about simultaneously moving forward with the FDA on that franchise, as well.

Okay, can I ask you a quick question regarding VALSTAR and Urocidin, and you obviously took an option out on Urocidin, was this based on an expiration date of that option or was there something in the VALSTAR launch that you felt that there was a lot more of a need than you expected and you thought this would be a significantly attractive opportunity for you?

This is Dave Holveck. We're positive about the Urocidin. I think the opportunities for us, as we look out, ties into our business development strategy which is we really want to move in a directed fashion for geographic expansion. We think that this opportunity provides, along with some of the other opportunities that we're looking at, a way of facilitating that expansion. We obviously, as I said, feel positive and again I wouldn't read anything into other into it other than we think it's an asset and could be leveraged internationally and we wanted to secure that and move ahead on that.

Thanks, I'll get back in queue.

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

Good morning. Just a few questions. First of all, on the generics business, can you give us a better sense of what's been driving the strength and what outlook you expect for 2010? And second question is on Opana ER with the 30 month stay expiring for impacts in May, can you give us some sense of how we should think about this one versus the litigation outcome with Actavis which is coming in in the second half of 2011? And I have one more question. Thanks.

Sure. Hi, Rich. I'll start with regard to generics. We saw very strong performance from our generic business in 2009. In particular, during the first half of the year there were some disruptions in supply of API in the market and by virtue of our being nimble and quickly capitalizing on that disruption, we were able to achieve attractive increases in sales of both Endocet as well as morphine sulfate. We were, in the case of Endocet able to retain much of the incremental share that we acquired with regard to that product, and so as we exit 2009 and we look at 2010, we believe that that franchise has expanded sales opportunities for us by virtue of that.

We have 15 ANDAs that are in registration with the FDA. We recently got approval for mycophenolate capsules and we expect to launch that later this year. This will be a year in which -- we have not had a launch of new generics in our portfolio for some time but we expect up to four new product launches in 2010 and this has been an area that we have invested on both with people as well as dollars in research and development and commercialization. Caroline, do you want to talk a little bit about Opana ER and the litigation?

Sure. The 30 month date you referred to, we believe is up in June, not May, but putting that aside, Opana ER is an important product for our business. We do believe in its IP, and we're confident that its IP can withstand the assaults from the potential generic competitors. It's important to note that we're going to continue to protect this franchise and in the meantime continue to invest in the Opana brand and do what's right for our business and this includes the continued pursuit of additional patent protection. There is a pre-trial conference scheduled for March 8, and we're very focused on preparing for trial some time in the third or fourth quarter of this year.

Just to elaborate maybe, can you give us a sense of why the outcome might be different with Impax than it was with Actavis in terms of timing of generic entry as a result of a potential settlement?

I think it would be premature for us to speculate on that. We believe we've got a solid case. We have as a planning assumption the retention of exclusivity for this franchise for the foreseeable future and we think that we have additional patent opportunities that are pending with the Patent and Trade Office that could continue to enhance the intellectual property estate.

Okay, and then just on Aveed. You mentioned you expected some feedback from the FDA later this year. Can you give us a better sense of specific next steps and the timing of those next steps?

Yes, hi, this is Ivan. Well, as you know, we heard from the FDA at the end of last year and we intend to get back in with them in the second quarter. We've prepared what we think is a good way forward and we want to go down there and discuss it with them.

Okay, and then just lastly on Voltaren Gel, can you give us a sense of the numbers around tubes per script and how that may have changed versus the last quarter?

Yes. Tubes per script are about 2.56 tubes per script. We have continued to see the number of tubes per script increase in response to our promotional activity. Having said that I would tell you that as we get more and more familiarity with our product and the commercialization effort, I think script growth is probably a better barometer going forward for how we measure the product itself. We've had the opportunity to improve our formulary positioning. We have good pharmaco economic data that position topicals as safe and effective first line therapy. Some enhanced targeting to core regional territories and long term care facilities, a focused target communication to consumers, to activate a discussion with physicians, all of which we think will continue to drive script growth for the product in 2010.

And were there any changes in inventory in the quarter relative to the third, of note?

Nothing particular. Inventories still for Voltaren Gel is at the lower end of our DSA agreements with our wholesalers and we haven't seen any significant movement in that regard.

And I would say that the V-Gel has gone through some very nice growth but it's also established a beachhead for us in this pain area with the specialists. And, again, it's an area that we think is attractive relative to our business development strategy to build off of. So it's a strong product, enhances the franchise in pain and gives us, again, another leverage point for continued growth.

Okay.

Next question, please?

Your next question is from the line of Corey Davis from Jefferies. Please proceed.

Thanks. First question is just on the business development landscape. Dave, has anything changed with respect to your appetite to do a deal that might be dilutive? I assume that if you grab a product that's in development the additional R&D expense is not contemplated in your guidance right now, or if I'm wrong, how much flexibility do you have to absorb additional spending?

Well, again, I'll let Alan speak a little more specific on that but let me give you a little bit more of a focus on the way we're looking at business development. One is that we're looking for revenue generation. I think it's important that we, again, improve and grow that top line. Having said that, we have strategic directions that we're looking at. And I think, as we've already outlined for you, that stuffs a pretty broad field when you look at urology, oncology and pain, generics, even in some cases looking at some of the orphan opportunities that present us. I think all of that is well within our reach. I do not see that as being dilutive. Again, we'll not avoid looking at development projects but mostly, as a way we are looking at it is it's executing a revenue generating strategy. But Alan, you may want to give a little bit more pointed view on the financial underpinnings of the way we look at BD.

Sure. The guidance that we provided for 2010 is for our core operations which is everything that is currently in the portfolio plus products that are in our pipeline. It does not include any potential for business development transactions. We do have a predisposition to do deals for products with on market revenues, and my expectation broadly speaking is that that kind of opportunity would be EPS neutral to EPS positive, either immediately or very quickly thereafter. And we will remain financially disciplined in the way we go about utilizing our balance sheet in support of these business development activities and at the time that those transactions are announced we'll have further comments with regard to financial guidance around that.

And certainly, Corey, from an R&D standpoint, we are very well poised to take on new products that come into the pipeline at any stage. There's been a major change in the way we structured R&D. While we haven't grown per se, we have changed the skill sets. We now have an R&D organization that can handle assets from the very earliest part of discovery all the way through to Phase IV. And we are also able now, with expertise both in the discovery area and in the development area to handle not just pain assets but also urology assets, endocrinology assets and oncology so we're well structured to go forward.

And by that you mean you have the right personnel, the right people in place?

Yes, we have the right personnel and people in place which we didn't have previously. We have experienced industry players sort of both in discovery in these specialized areas as well as in the development area, oncologists, endocrinologists, who have recently joined our ranks.

And also in the platform of a science, when we talk about generics, we talk about the delivery platforms, HYDRON being one element of it. Also with soft gel and transdermal. So those have been added. And again the areas, even in the device sector, we've put in specialists in Ivan's group for development. So I think we're well set, positioned, if you would. We built that through '09 and it's a nice opportunity to leverage from the human resource standpoint on our development strategy.

Sorry, Corey, I was just going to add to Dave's, I think you'll see some interesting collaborations coming out in 2010 too.

Okay, and Dave, while you're on that point, how about management on the commercial side? Any changes in the reporting structure there or things we need to be aware of?

I think the commercial side has gone through a very positive transformation. We brought in two industry specialists on the two business units relative to pain, Brian Lordy, and then on the urology/oncology, Rich Dudek, so those two business unit managers are in place. They came in pretty much the second half of the year and have reshaped that.

I think we've also bolstered our clinical affairs team, which supports our sales group. We've also heavily invested and bolstered the group for managed care and for economic analysis and such. I think the opportunities of all that now coming under the organizational leadership of the Chief Operating Officer, which we would hope to be able to announce within the next three to four weeks, I think really puts us in a strong spot. You're seeing, I think, the by-products of those changes already with our numbers in the second half of the year and I expect, again, to earlier points that Alan made, our core business looks strong and then the platform for building off of that with business development that Ivan talks about equally looks very strong.

Great. Thanks, everyone.

Your next question is from the line of Mark Goodman with UBS, please proceed. Just on the inventory changes you had mentioned Voltaren.

Could you just talk about Opana and Lidoderm? Any inventory changes from the third quarter to the fourth quarter that we need to be aware of? And then secondly, can you talk about some of the pipeline products that you haven't talked about yet, just give us a quick update on where we are?

Sure. This is Alan Levin. I'll talk about the inventory side and then turn to Ivan to talk about pipeline considerations. Broadly speaking, inventory remains pretty consistent with where we were at the end of the the quarter. The inventory levels tend to be at the lower end of our agreed contractual levels with our wholesalers and have been there now for the last several quarters.

Yes, certainly, and I think the pipeline is more exciting now than it's actually been before ever. In no particular order but I'll start with the big ones. Urocidin, of course, we should be seeing some headline data in the second quarter for the ongoing refractory bladder cancer study. And of course we're very much committed to that product and it's been mentioned already. We've taken over, assumed worldwide rights for that, so we'll be thinking more about our global strategy in that regard.

Axomadol, which is the novel pain agent, we've clearly invested in pain, continue to grow that. This is a novel and NCE with a dual mechanism of action. We've initiated with our partners two very large programs in the US, we call these 2B programs, one in low back pain, one in diabetic neuropathic pain. And we would be hoping to see results from both of those studies in the first half of 2011.

Our HYDRON implant study in acromegaly is going very well indeed, and I would hope we can see some results from that in the second half of this year, and hopefully if that's successful we'll be looking at a filing in 2011. Also, with the HYDRON, octreotide implant, we're running our carcinoid program. We've also got some other life cycle programs in the pain space which we're pretty excited about. We've mentioned before that we've got investment in TRF or tamper resistant formulation strategy. We believe that down the road that's going to be a cost of entry in the pain space. As I said we're very much committed to the pain space and we have a lot of knowledge, particularly with regard REMS. And similarly, we're looking at a new patch technology with the caine, so that's a life cycle for lidocaine. So as I said, where I won't go at this point is discovery. We've got eight early discovery programs which we've kicked off in 2009. We believe we'll be growing more of those in 2010.

Thanks. One other quick question, I just want to make sure I heard right. You said R&D would be up this year in absolute dollars but as far as the R&D ratio, it will be roughly the same as what it was in '09, is that correct?

That's correct on both of those points. We will be investing more in R&D but the ratio as a percent of revenues stays.

Thanks.

Your next question is from the line of John Boris with Citi.

Thanks for taking the questions. The first one is for Dave. I think Alan, you outlined how you've been able to lessen as a percent of total sales Lidoderm from 61% to 52% in light of business development on the horizon in pain, uro, endocrine, oncology, orphan, generics, et cetera. Is there a revenue target that you, at least it sounds like going you're going to be in licensing multiple revenue opportunities, that you'd like to drive that number down to as a percent of total revenues over time?

Sure there is. And do it for the right reason, by increasing our revenue line. I think the sustainability of our business model is, I think you're starting to see with the diversification of both platforms and therapeutic approaches. For us, I want to crack that 50% mark. I won't be more specific than that but that's where we're driving. I think we're in a position to do it now and I think everything you've heard in terms of both the personnel and our commercial, new techniques, Ivan I think gave a pretty nice rundown in terms of where his R&D position is. And I think that's a target that we can hit on.

And I would say, John, the increased diversification vis-a-vis Lidoderm comes in two ways. Organic growth from the business and we're seeing very attractive growth of products like Opana, Voltaren, SUPPRELIN, which help to diversify Lidoderm as a percentage. And then as Dave has also indicated, we are targeting multiple deal opportunities this year primarily for products with on market revenues, so the combination of that should enable us to move swiftly in that regard.

Okay, and I'll follow-up then in that you did indicate driving revenues for Opana and other assets. What are your assumptions in light of the 30 month exclusivity period ending in June 2010? Do you have any assumption for generic competition in your guidance for Opana ER? And then same question on Voltaren Gel, I think marketing exclusivity for the product is through October '10 and you could see some generic competition there. Just your assumption on those two assets?

Yes, we assume in both the case of Opana ER as well as Voltaren Gel that we will continue to enjoy full exclusivity this year. With regard to Opana Immediate Release, that is a product that lost exclusivity in June of last year and is showing very strong legs in terms of life cycle management. We saw full exclusivity on that retained through the end of last year and our assumption with regard to Immediate Release on Opana is that we'll have it for the first half of the year.

Okay, and then on the tax rate, you did indicate about some tax efficiencies. Can you maybe just be a little bit more specific on what's going on on the tax line and how sustainable that is going forward?

Sure. I think there are a couple of drivers on that. One is in the fourth quarter of this year, Pennsylvania passed a new state income tax statute. Pennsylvania is an important state for us. Traditionally income tax has been apportioned on a number of factors including employees and physical assets. Given that our home office is here that leads to a high tax liability. The apportionment factors changed and we're less dependent on those so we expect a lower Pennsylvania state tax liability. That was retroactive, although it was passed in the fourth quarter of '09 it was retroactive to January of '09 so we get a full year benefit in 2009 and we expect to see that benefit going forward in 2010, as well and beyond. And then with regard to Indevus, we did acquire net operating losses as part of that transaction, and as we continue to look at the integration of Indevus and our ability to utilize those losses, we now believe that there is a ability to utilize a higher percentage of those net operating losses in 2010 and going forward. Both of those factors combined to drive an attractive reduction in our effective tax rate on a sustained basis.

Thanks for the color. It's great color. And on the NOLs, what do you have remaining from Indevus?

I'll come back to you in just a moment on that. There's actually a multi-year utilization on those NOLs so I just want to make sure we capture the right number.

We'll get back to you on that, John.

Okay, thank you.

Can we go to the next question please?

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

Hi, a couple of questions. First on Lidoderm, I know that you're still committed to the product and growing it, but how are the resources behind it compared to a year ago, how is that going to change this year? And I'm specifically talking from a sales force standpoint, if you could give us the allocation in terms of the sales force behind that product?

We don't comment with regard to promotional resources that are product specific but broadly I can tell you a couple of things with regard to Lidoderm. We do continue to invest behind the product from a standpoint of promotional considerations. We have put in place some support programs at the pharmacy level to improve the persistence in utilization of Lidoderm as we go forward. We have a robust formulary access and a broadly comparable contracting position in 2010 through 2009. We have put in place new analytics and techniques to ensure that we optimize the value of that formulary and contracting position as we move forward. We have improved targeting and other changes in the promotional mix including targeting in the long term care space in the top 10 states and new approaches to customer segmentation which involve both personal as well as non-personal promotion. So it's not just a function of field force activity. It's also a function of how we look at optimizing the return on our contracting investments. It's also a function of advertising and promotion, and in some cases it's a function of pharmaco economic data. And our customer segmentation approach allows us to delve more deeply into specific customers and geographies to optimize that mix. That was good work that was done within the commercial organization last year. We're already beginning to see it bear fruit in 2010.

Okay, so is the low single digit growth that you're forecasting for 2010, is that more volume improvement or is it discounts? How do you think about that and is there still potential for price increases on the product going forward?

There certainly is potential for price increases on the product. Generally we have seen modest price increases for Lidoderm in the low single digit area, and some of our contracts provide restrictions on the extent to which we can increase prices without having to incur an increased rebate. So it is quality growth that is driven by volume more than anything else.

One other question, just to come back to John Boris who inquired about Indevus NOLs, there are about $125 million in NOLs that remain associated with Indevus. That will expire in 2014.

Okay, and just one last question for Dave. Just following on the business development discussion, where would you say are most of the efforts focused in terms of therapeutic area? Is it equal across the different areas or are you trying to skew it more towards pain or away from pain? Can you just put a frame work around that? Thanks.

Yes, sure. The way we look at it is I think pain is one that is an immediate target. We have the resources to leverage that and a strong position, so that's probably the top priority from my standpoint, the investment in the pain area. I want to expand in a more diversified way in the urology/endocrine and oncology. Again, we've made mention, I think both the investments and the success of the generic side of the business is always there because that again has a much broader set of opportunities that we can expand on and build out on. So it falls into that type of priority list.

Okay, thanks.

We can go to the next question please?

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

Yes, thanks for taking the question. First on gross margin, can you give a little more color on the reasons for the decline and maybe the trend that you're seeing into 2011? Are you expecting just a one year decline because of your assumptions on generic Opana ER and other product mix or do you think that you're now in a lower gross margin standpoint? And for generics, it was unclear on the outlook for 2010. Are you looking actually at growth for that business or were there some one-time benefits last year that won't recur? Thanks.

With regard to gross margin, I think there are a couple of considerations that are associated with that. One is just an overall change in product mix, particularly with the introduction of a full year sales effort of the UEO products into the Endo portfolio. Secondly, Opana ER does have a royalty that picks up as we sell more and more of the product and so with the attractive sales trajectory for the product we expect bigger royalties to our partner in regard to that and that will have an adverse effect on gross margin. We do have a contractual price increase associated with Lidoderm from Teikoku Seiyaku, our supplier this year that will kick in after more of a hiatus in terms of price increases over the last couple of years. And then lastly, the adverse impact of the yen/dollar exchange rate as our purchases of Lidoderm are tied to the Japanese yen. So the confluence of those factors given our growth trajectory lead us to continue to believe that we'll see some pressure on gross margins itself.

We don't actually comment on guidance beyond the current year and so I couldn't comment about 2011 and beyond at this point in time.

With regard to the generics portfolio, we did see some one-time benefits in 2009 with respect to the market dislocation and that generated about $25 million to $30 million of incremental benefits from our generic franchise. Having said that, we were able to take full advantage of that and increase our share for one of our key products, Endocet, and so we see some sustained benefit that has come from that and will continue into 2010 as well, but probably not to the same magnitude as we saw with the market disruptions in '09.

If I could sneak in one more question on tax rate, I know you were looking at about 33%. Is there any fluctuation you're expecting with the R&D tax credit or with the state taxes that you mentioned?

No, I think that that's the full year rate. There may be some quarter to quarter fluctuation in that regard as the business unfolds over the course of the year but overall, we're pretty comfortable with the 33% rate.

So it shouldn't be the magnitude that we saw in the fourth quarter this year?

No. I think that again, in the fourth quarter of this year, you see a catch up effect, in part because Pennsylvania enacted a new state tax law that was retroactive to the first of the year so you have a full year effect that's caught in the fourth quarter. And then the second driver were really some of the incremental efficiencies around Indevus, so as we pull in additional business development transactions, we'll clearly evaluate the tax efficiencies and implications of that in connection with anything new that we do, but that's not contemplated in this guidance.

Great. Thank you.

Thanks, Dave. We have about enough time for two more questions.

The next question is from the line of Ian Sanderson from Cowen & Company. Please proceed.

Thanks for taking the question. Actually, for Alan, on the amortization charge in Q4, that $19 million that looks to be the ongoing number, I first wanted to ask is that representative of what we should be looking for going forward or will the writedown of the Aveed asset change that number? Secondly, on the operating margin, are you looking for operating margin expansion in 2010 over 2009 despite the gross margin decline or will that number essentially be flat?

On the $19 million that you're referencing in gross profit, Aveed is not included in that number and is not amortizing as part of that, so I do think that that's a reasonable number to annualize for 2010. Could you repeat your last question, please?

Just on the operating margin, I thought early in your prepared remarks you may have mentioned that figure and just wondering if there was any guidance on where that will stand in 2010 versus 2009?

We haven't put a bright line benchmark out there. What we have done in the last two years on an adjusted income basis is reduced SG&A and R&D as a percentage of our revenues. I expect that that will continue this year. It will be the third consecutive year that we're doing that, reflecting the strength of our core business. The magnitude of that reduction will, in part be a function of where we end up within the revenue range but the actual dollars on those expenses themselves we expect to be broadly comparable to 2009 in the aggregate.

Okay, and then finally a pipeline question on octreotide implant, any thoughts on when we may see data from that Phase III program?

Yes, so the acromegaly study, as I said, is progressing quite nicely now, and we would hope to have some data on that program by the end of second half of this year, and if that's successful, then we would be looking to file in 2011.

Great. Thank you.

Thanks, Ian. Can we go to the last question, please?

Your last question is from the line of John Newman with Oppenheimer.

Hi guys, thanks for taking the question. I just wanted to -- apologize if this has already been asked but from the BD perspective you've made a push to diversify the business by moving into pelvic health, but given your past success in pain, should we consider that's an area that's still open for business development for Endo going forward since you've obviously done well there over time?

The answer is absolutely yes, and to a previous question, I prioritize that as probably number one just because, as you indicated, both the legacy of the Company, the infrastructure is well positioned to take that. I think equally, some of the opportunities in some of the other franchises open up some more doors for geographic expansion. But again we have to build some of the infrastructure around that. So the pain franchise and even what Ivan reviewed for you in terms of some of the development programs that he's working on are, first and foremost, in alignment to grow that in the pain. And again, I would specify the generics business where we've for a long time have had a very solid position there and we're looking to add more opportunities in that arena. So all being said, pain is an opportunity for us near term. Some of the other franchises are going to follow and will help us in our geographic expansion.

Okay, great, thank you.

At this time I'd like to turn the call back over to Dave Holveck for closing remarks.

Again, I appreciate both the questions and the interest of the Company. And I think what you're starting to see, hopefully, is the evolution and the transfer of what we've set a direction of building out a Company that can produce the strong numbers. And I think you're seeing that, but more importantly I hope you're starting to see the fruits of the organizational enhancements we've put into place, the diversification we put into, not just on therapeutic but platform, a pipeline that again now has an enriched look from midterm as well as long term. When you add all that, along with the abilities to take on the additional revenue growth with BD leveraging our organization and our financial resources, I think this is again a position that we hope to achieve in a very prompt time. And I think we're well on our way in executing and showing the value creation that I think our shareholders are looking for. So I appreciate all of the support and look forward to keeping these updates going in a positive direction as you've seen in this call. And on that I'll close it off. Thank you very much.

And ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.