Endo International PLC (ENDP) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2010 Endo Pharmaceuticals earnings conference call. My name is Michelle and I will be your operator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Blaine Davis, Vice President Corporate Affairs. Please proceed.

Good morning everyone. And thanks for joining us. With me on today's call are Dave 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 Gergel, Executive Vice President of R&D and Caroline Manogue, our Chief Legal Officer will help answer.

We 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 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 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 early this morning. Now, I'll turn the call over to Dave.

Thanks, Blaine. We had a very solid first quarter with 9% increase in product sales over last year and earnings growth of almost 10% over the first quarter of 2009. We had solid revenue growth across the board, especially in our urology business and our revenues today reflect a more diverse product portfolio. For example, Lidoderm sales, which increased 6% over last year, now represents 50% of our revenues versus 61% in 2008. I believe the first quarter results also reflect focused work of our commercial team and the strong foundation for growth we established last year.

As you may recall, we admitted our Company to grow through the combination of internal R&D, collaborations with academic institutions and pharmaceutical companies, and enhanced sales and marketing efforts and new product or Company acquisitions. Our 2010 revenue guidance of $1.55 billion to $1.60 billion represents growth of 6% to 10% and reflects this commitment. Of all these initiatives, finding new opportunities and maximizing the efficacy of our efficiencies of our sales and marketing organizations are top priorities this year and the focus of much of my remarks today. Our guiding principle is to find opportunities that complement our pain management, urology and endocrinology franchises and build on our expanding relationship with physicians who specialize in these areas.

We believe that diversifying our business is critically important as we look at the changing healthcare landscape. We will focus on a broad set of options which include both branded and generic drugs as well as devices and diagnostics. This strategy anticipates -- anticipated many of the changes taking place in healthcare today and I'm convinced that it's the right way for us to build a sustainable growth business. Our focus on finding new pathways to patient care and becoming a better healthcare partner is all about offering more products, filling gaps, delivering innovative solutions to a more diversified, health delivery system. And providing more effective care to patients. I think we're in a great position to find these opportunities and fill these gaps. And that the deals we are working towards will support this vision and the goals of Health Care Reform.

As we move forward, we're continuing to strengthen our organization. We're very pleased to announce the appointment of Julie McHugh, as Endo's Chief Operating Officer last month. Julie was recently CEO.of Nora Therapeutics and before that she was the company group chairman of Johnson and Johnson's global urology business unit. Julie and I worked together at Centacor, where she helped lead the Remicade franchise and eventually became Centacor's president. She has an impressive record of achievement in product marketing and planning, sales leadership and corporate management.

Julie will be responsible for managing our sales and marketing organization, achieving sales and profitability goals, evaluating deals and new business strategies and implementing commercial acquisitions. She is a terrific addition to our leadership team and I'm confident she will play a major role in helping us take Endo to the next level of success and we look forward to Julie joining us on our second quarter earnings call.

Developing our late stage pipeline remains a high priority and we're continuing our efforts to advance our product candidates towards registration. We're currently finalizing our complete response to the FDA for Fortesta and plan a meeting with the FDA this quarter regarding the path forward for AVEED. These two products complement each other and, again, one topical agent with the convenience advantages, the other long acting injectable with compliance advantages. Together they represent a very attractive franchise to which we remain committed. We also look forward to analyzing the results of our Phase III study of our [Creatide] implant for the treatment of [acquivania] this year. Now, I'll turn the call over to Alan to review our financial results for the first quarter. Alan.

Thank you, Dave. I'll review our first quarter results in a moment, but first I'll comment on our assessment of the financial impact of Health Care Reform and our confirmation of financial guidance for 2010. The overall impact from Health Care Reform reflects a number of uncertainties. Nevertheless, we believe that changes to the Medicaid fee for service program and managed Medicaid will drive the bulk of our estimated impact in 2010.

There are a number of other provisions in the legislation that collectively are expected to have a small impact, such as originator AMP for new formulations, the expansion of 340B pricing and the revision of the AMP definition to remove physician class of trade. We've considered all of these items in our analysis. But to be clear, mandated changes in Medicaid fee for service and managed Medicaid drive the vast majority of the revenue impact in 2010. In total, we expect that the various elements of US Health Care Reform will adversely affect our 2010 revenues by about $20 million. We know that certain changes will not have an effect until 2011.

In particular, reducing the size of the donut hole in Medicare Part D coverage by 50% and the payment of a Health Care Reform fee will both have an incremental effect next year. We believe that these and other changes will produce a top line impact larger than the $20 million outlined for 2010. The situation is fluid, however, and will continue to evolve. Notwithstanding Health Care Reform, we remain committed to achieving our financial and operating targets for 2010. We continue to anticipate revenues of between $1.55 billion and $1.60 billion. Although the impact of Health Care Reform increases the likelihood of our now being in the lower half of the range.

I would emphasize, however, that reconfirmation of our revenue range reflects our continued confidence in our core business to perform in line with expectations for the year. We also continue to anticipate adjusted diluted earnings per share of between $3.15 to $3.20. We believe that our flexible cost structure, coupled with a further potential reduction in our effective tax rate, will enable us to absorb the previously mentioned revenue impact from Health Care Reform.

Reported or GAAP diluted earnings per share is now expected to be between $2.31 to $2.39 per share, reflecting the impact of additional milestone payments in order to advance our development pipeline among other factors. For the first quarter of 2010, we had strong total revenues of $364 million, up 9% over the first quarter in 2009. On an adjusted basis, gross margin was stable at 79%, when compared to the first quarter of 2009, despite a year-over-year increase in the royalty rate on sales of Opana ER. Nevertheless, we continue to believe that for the full year, adjusted cost of sales as a percentage of total revenues will increase by two to three percentage points relative to 2009.

Lidoderm had a solid quarter with revenues of $183 million, up 6% versus the first quarter of last year. And we continue to expect low single digit growth for this franchise in 2010, driven by a combination of script growth and a modest pricing benefit. Opana and Voltaren gel saw strong year-over-year sales growth, reflecting continued promotional support to drive script growth, as well as the impact of our contracting strategies. In our urology and endocrinology business SUPPRELIN LA also performed well and set a new high for quarterly sales.

As well, we continue to be pleased with the launch of VALSTAR for refractory bladder cancer. Patients and physicians have benefited from the return of this therapeutic option to the market. Finally, VANTAS also made a contribution to our top line growth. Total reported operating expenses for the quarter were $164 million. However, on an adjusted basis, total operating expenses for the quarter were $154 million. This total is comprised of selling, general and administrative expenses of $128 million, and R&D expenses of $26 million.

Together, these items increased 11% versus prior year adjusted total operating expenses of $139 million, with growth driven primarily by the impact of incremental investments in R&D to advance our pipeline projects, coupled with a full quarter of operating expenses in 2010 related to the former Indevus urology and endocrinology business relative to a partial quarter in 2009. First quarter adjusted net income was $87 million, up 10% over $79 million during the first quarter of 2009. Our reported diluted earnings per share increased $0.51 versus $0.33 in the first quarter of 2009. On an adjusted basis, adjusted diluted EPS increased 10% to $0.74 versus $0.67 in the first quarter of 2009.

Our adjusted effective tax rate for the first quarter of 2010 was 32% and benefited from year-over-year from a reduction in certain state income tax liabilities as well as a full quarter's impact this year of net operating losses associated with last year's Indevus acquisition. We now expect our adjusted effective tax rate to be between 32% and 33% for the full year. And as a final note, Endo repurchased approximately $30 million of its stock during the first quarter and we intend to repurchase additional shares this year. The magnitude of additional share purchases will be determined in part by the scope and pace of business development activity this year.

Overall, we had a 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 still further diversifying our business. This concludes my prepared remarks, now I'll turn the call over to Blaine.

Thanks very much, Alan. This concludes our prepared remarks, I'll turn it back to the operator and we can begin the q&a session.

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

Hi, guys. Thanks for taking my call. Just a couple quick questions. You mentioned that you were going to be moving into branded generics, devices and diagnostics. On the device side or on the technology side, rather, you did acquire an implant technology from Indevus and we haven't really heard much about that. Can you talk a little bit about any plans around that and sort of bring that more forward in terms of product development, if some of these business development deals are taking longer to sort of come to fruition?

Dave Holveck here. Appreciate the question. As I indicated when we did the Indevus deal that the delivery technology was an important one. I think as an adjunct to the way healthcare is going to be looking at ways of having better compliance. I think the elements that you bring up, where are we, some of that data will be forthcoming in the second half of this year. We've advanced in a number of ways on that, both in the people, the organization.

We're looking at right now a second generation, which, again, is not to get into detail, but I think offers us a number of opportunities, both in the way we formulate drugs, different drugs and applications we can use, as well as opportunities in the partnering relationship with other companies, because we do see it as an opportunity to work with other players in the area of drug delivery.

Again, as we go forward, your comment about where we are in business development, that's an active objective, certainly for myself, and although we don't comment on timing, your point about the delivery technology fits well into that and I'll leave Ivan a little bit to give you a little bit more of a color on that.

Thanks, Dave. Hi, Annabel. As Dave mentioned with the first generation we have two significant programs under way. The Acromegalyprogram which using the HYDRON implant. We hope to have Phase III results later this year. We've also got the Carcinoid program that's well under way now and as Dave mentioned we've got a very, very active team looking at ways to bring the second generation forward. We've identified some very, very exciting target molecules for that and we hope to be able to say more about that in the not too distant future.

Okay. Great. And I guess second question, a little bit more mundane on Lidoderm, obviously based on prescription trends we thought it was going to be a relatively solid quarter. Seems like it came in a little bit lighter than expectations. Should we assume that there was destocking from the fourth quarter? Can you give us a little color on what's going on there?

Sure, it's Alan here, Annabel. We do think Lidoderm had a solid quarter, up 6%, and it is tracking consistent with our expectations for low single digit growth for the product over the course of the year through a combination of script growth as well as modest pricing benefit. Relative to the fourth quarter, we have seen some fluidity in contracted lines that's not atypical in the first quarter of the year as you finish one contracting cycle and begin a new year with payers on balance.

We are pretty pleased with the contracting position for Lidoderm. We think that there are opportunities in that contracting position to capitalize on improvement in our formulary positioning and our expectation is that we'll execute on those over the remainder of this year. We have a good history of being able to capitalize on that, not only with respect to Lidoderm, but with Opana and Voltaren gel as well. So we have good confidence in that regard.

From a pricing perspective, Lidoderm saw some price pressure in part as a function of the timing of price increases year-over-year. We took a price increase in February of this year versus January of last year so there's only a partial quarter year-over-year impact. And as well, the impact of Health Care Reform on our Medicaid book of business had a modest impact on Lidoderm itself.

Already in the first quarter?

Yes. As I said, a modest impact. The Medicaid mandated changes in Medicaid are retroactive to January 1 of 2010 so we're required to take that into our calculation of net sales during the first quarter.

Just to clarify a point that you made, are you saying that you lost some contracted lines?

No. There's some fluidity as lines move from one plan the to another and on balance we think we end up with a better formulary position over the course of 2010.

Okay. Great. Thank you.

Thanks, Annabel

Your next question comes from the line of Greg Waterman from Goldman Sachs. Please proceed.

Thanks for taking the questions, guys. I want to go a little bit further on the Health Care Reform impact. Is there any way you can help us think about the distribution of the $20 million revenue impact by product?

So thanks, Greg, for your question. It's Alan here. I think that, again, the impact of Health Care Reform is fairly modest. It is largely a function of our Medicaid book of business. If you think about Lidoderm being about 50% of our product portfolio, the bulk of that impact, therefore, in any given quarter is more Lidoderm related but Lidoderm itself has a fairly modest representation in Medicaid itself. It's less than 10% of our sales and that's part of why the effect is so tempered, it is also part of why we continue to expect to see resiliency in that brand as well as our core operations this year.

Great. Thank you. Appreciate it.

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

Thanks, a couple of specific ones and then a more general one. First on reform, does the $20 million estimate for 2010 include any accruals for the Part D provision that takes effect in 2011?

No, it does not. It is driven primarily by our mandated changes in Medicaid. As we get closer to 2011, we'll see how that continues to unfold.

And the impact in Q1, should we think about that as roughly a quarter of the $20 million in terms of impact that was seen in the first quarter?

I think that's a fair characterization, Greg. Generally speaking, given the retroactive date on the Medicaid changes.

And then can I ask you about inventory level changes. You may have said this and I missed it. But any changes for Lidoderm that you could quantify or the other key products from last quarter to this quarter?

From the fourth quarter to the first quarter, inventory levels were pretty consistent. They have tended to be toward the bottom end of our agreed contractual levels with our wholesalers on a DSA basis. We did see some retail level destocking of inventory in the first quarter of 2009. You may remember that that was a period of time in which the pharmaceutical industry in general saw destocking at the retail level, Endo was no stranger to that as well. We've seen a more normalization of that retail inventory patterns in 2010 and the quarter benefits from the year-over-year comparison.

Okay. And then on Opana ER, do you have an opportunity to launch a new form or any new forms of Opana ER before September of 2012?

Dave Holveck. No, at this point we don't have any let's say announcements in that area. Let's leave it at that.

My last question is perhaps for both of you or the whole team. You talked about the need to evolve the portfolio and the strategy. Shareholders have not been rewarded in any tangible way in absolute or relative terms compared to the peer group. I guess the frank question, Dave and team is sort of what can the team do in coming months to convince investors that there is value to be had here and what's the sense of urgency to achieve that.

Thank you for the question. No problems in terms of being direct. I think the opportunities are very much ahead of us. I think to your questions relative to health reform, we've gotten into a number of the elements on the accounting side but to me the big significance of health reform is that it's an opportunity now that allows us to plan up against it.

I do think that we are going to have different opportunities created as business models change, as more diversified healthcare system emerges and to the point I made in my opening comments where we have looks at a more diversified portfolio, all of these I think lead a greater opportunity for us to execute against. Now, as far as urgency, we have taken this Company through I think a tremendous amount of change in the certainly two years I've been, both on a management as well as diversification, again my points of where Lidoderm is relative to where our significance of Lidoderm against our revenue line.

I think we established internally-- internal R as well as D to some of the comments that Ivan made, these are all areas that will continue to emerge and add to the growth of the Company. I think, again, the biggest issue that I tend to stress is that we are a much more diversified Company. We have a pipeline today that I think reflects a good (inaudible) steppings of growth. And as far as the opportunities on the business development, they continue to remain very robust in the sense that we have positioned ourselves through pipeline and relationships as well as the Indevus with the addition of that sales team to pick up more of these products.

So all of this I think as we step into, from my tenure into the third year, I think we're well positioned to have a foundation to build off of. So I think it's a very exciting opportunity and relative to Endo, I think it's a very exciting Company compared to others in our peer group.

Thanks for addressing that. It's certainly a question that I've gotten from time to time so thank you Dave.

Right. Next question, please.

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

Good morning, wondering if you could comment on your expectations for the [Covedian] product in terms of differences and how you plan to counter detail, assuming that Covedian is fairly aggressive in the marketing of their product, vis-a-vis Voltaren gel.

Just for clarification, which product are you referring to from Covedian?

Nsaid.

So Covedian's product is a topical Nsaid and from a competitive position relative to V gel, we think that V gel is very well positioned. We are seeing strong performance from V gel this year. We see increasing physician acceptance, good response to our promotional efforts with regard to Voltaren gel. We are initiating targeted print direct to consumer advertising that we think will further differentiate the brand and that brand equity will continue to (inaudible) to our benefit in managing that franchise as we go forward. I think these are all key advantages, given the thoughtful way in which we've been building our sales base here.

Thank you.

Thanks, Rich. Can we go to the next question, please.

Next question comes from the line of Corey Davis of Jefferies. Please proceed.

Thanks very much. Just a couple questions. The first, do you guys see any major impact from Purdue's pending launch of the tamper resistant Oxycontin on the Opana franchise?. And secondly while we're on the pain for Ivan, any new thoughts or developments with respect to Axomadol in development.

Let me first I'll let Ivan obviously chime in relative to where we are on the Axomadol development. I think we've kept a very close eye on this whole issue on tamper resistance. I do think the government has stated very clear that misuse and abuse is one of the high points.

Having said that, a lot of their emphasis have been of the REMs programs which we have a long history with. I don't know at this point that I can show any significance at this point as I look at the market trends relative to where PRF has caused an inflection in scripts or in terms of economic advantages. Having said that, I think it is an element that will continue to be within the purview of the agency, to look at how to better solve misuse and abuse.

And we, as we indicated before, look at it and have a position, technical position, if you would, in this particular area. So, relative to where we see it economically or impacting the market and revenue, too early yet to really determine. Relative to the futures on pain, I'll let Ivan speak a little bit on the Axomadol.

Thanks, Corey. As you know and we believe, we don't think the Purdue product is going to have differentiated label. It will have the same label as the current product. As a Company we're very much committed to the pain space, ensuring that patients have access to necessary medicines, particularly for chronic and severe pain, and we also, as Dave said, we also very much involved in ensuring that there is efficient sort of risk management in place so that the right patients get the right medicines and it minimizes abuse and misuse.

And, we have spoken previously that we do have investments in the TRF space and that's certainly something we continue to be interested in down the road, but as you point out, clearly Axomadol is a novel type of pain medicine. We hopefully will have results from our Phase II-B study in low back pain at the first half of next year. We're very optimistic about this program. We hope that we will be able to demonstrate both efficacy and/or safety differentiation and advantages as well as potentially advantages from a scheduling standpoint.

Okay. Great. And then second question. I might be one of the only ones having a very difficult time quantifying all of the impact from this new Health Care Reform, but can you first remind us what percent of current Lidoderm revenue is from Medicaid, from Medicare Part D, and from just regular commercial pay? And then the second part is how do we think about quantifying the donut hole effect for next year? Maybe not even just for Lidoderm specifically, but in general, if you can help me with that. Thanks.

Sure. So, hi Corey, it's Alan Levin. With regard to Health Care Reform, Lidoderm revenues from our Medicaid book of business are fairly modest. It's less than 10%. And I think that drives a big reason for the mitigated impact of Health Care Reform for us in 2010.

As we begin to think about 2011, we see risks as well as opportunities. Certainly in the donut hole, what we found are that seniors are seven times more likely to use our products, particularly when they're in a Medicare plan. We think that the closing of the donut hole gives a potential opportunity for upside on volume although that would be offset by incremental rebates that would be required.

So it's a fluid situation. We would need to understand how prescribing habits begin to change over the course of this year now that that is no longer a component in physician/patient discussions.

I guess I would also add relative to the seniors and the management of pain, I think the opportunity, let alone the -- I guess the awareness of the effectiveness of Lidoderm, but the topical aspects as we do our studies and marketing studies, continue to be very well I guess supported by the elderly, by the physicians that treat for PHN and the application relative to the Lidoderm patches, has been a strong suit. I like the fact that again, with the donut hole, we don't lose patients. We have a continuum of care through that period and, again, we have to wait and see but there's some interesting marketing dynamics that could evolve that I would say would be more positive than negative, but we'll wait and see.

I guess I would also add, in closing on that question, when we think about our business it's not just our formulary position in terms of growing volume on Lidoderm. We have new initiatives in place with regard to long-term care that we think will in (inaudible) in volume benefits for us. We have put in place last year some additional detailing to a larger number of doctors who prescribe for PHN.

We believe that there is a six to nine month lag period before that begins to pay off for us. And we have also enhanced our promotional model that gives us a better sense of how best to target for maximal returns. So we see a number of operational benefits that should drive incremental volume growth for the product, other than our formulary positioning itself.

So for Lidoderm, Medicaid is less than 10% and yet the impact in 2010 is $20 million? Approximately.

Yes, but that $20 million, Corey, is spread across our entire book of business and Lidoderm as you know is only about half of our revenues.

Great. That helps. Thanks, guys.

Go to the next question, please.

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

Hi, I was hoping we could just round out the discussion on the pipeline. So just an update there. So Axomadol we've got the Phase II-B data in lower back pain in the first half of of 2011. There's a s second study. Is that one still on track.

That's probably going to come through slightly later than that one that's being run by our partners. But they're both being run in the US. But we will -- we'll certainly -- our goal is to have the results of our study out in the first half of 2011. And you're talking more generally about the pipeline, Marc, so we've spoken a bit about the [Acromegale]study and we'll hopefully have that data out in the second half of this year. That study is wrapping up at this point and the [Calcinoice]program is well under way.

And when are we going to get the data on that?

The Calcinoice that will be next year. That will be hopefully early next year. The other programs of course are both AVEED and Fortesta. We've been moving both of those along. We're very much committed to both and we remain excited about both programs of course. AVEED is our long-acting testosterone injection and we will be -- we will be meeting with the agency later on this quarter to try and work with them, a pathway forward for AVEED.

On, Fortesta, we have -- you'll recall that the FDA had asked us, had some concerns over the lab data. We've now completely rerun the vast majority of samples from the lab and I'm pleased to say that they've come out entirely consistent with the original analysis, so we intend to submit our complete response to the agency at the end of the first half. And we'll be meeting with the division quite shortly to discuss this response prior to submitting it.

In addition, we should have results from our Urocidin clinical program, the first refractory study, and those will be coming out also this quarter and we plan to initiate a large double blind study with Urocidin in the second half of the year, and this -- we're very much committed to the urology space and in particular, bladder cancer.

And again, just to an earlier question as to why I'm bullish on Endo, is two years ago we didn't have a pipeline with a depth that we can speak to today and the diversity of it. So again, that's a little bit more of a sharper point relative to where this Company is versus where it was and where it is relative to its peers.

This Urocidin study that you're going to start later this year, is it one big pivotal Phase III, that's all you would need for filing?

It's certainly -- yes, we -- this will be the second of course, because we currently -- the results from the first refractory study which was 120 patient study, we'll be looking at very shortly, as I said, within this quarter. But so the second one is really our -- if you like, our second Phase III pivotal study that we'll be initiating and we would hope that that is what we would need to file for refractory bladder cancer.

Thanks, Marc. Can we go to the next question, please.

Next question comes from the line of John Boris of Citigroup Global Markets. Please proceed.

Thanks for taking the questions. First one's Lidoderm specific, Dave. You clearly outlined that you've been very successful in driving down Lidoderm as a percent of total sales from 61% to 50%. Can you just help us understand how much further you would like to drive that down going forward? And then secondly, are you assuming any additional P4 filers in 2010 on the Lidoderm asset? And then I just have one additional follow-on.

Well, as a metric, again, I use it as a metric because I think the dominance of the Company when I joined was the one product. So we continue to want to grow. I'd rather say where do we look at our overall revenue growth and our revenue growth to me I want to continue to see this Company in the double digits.

So the metric of where Lidoderm fits against, I'd rather have you look at it as to where we are relative to our overall revenue growth and I think that plays more to the story of how we want to diversify both relative to our pipeline, that Ivan called about and the business opportunities that we go with. As far as your second point as to players coming into the market in this area, we feel very strongly about where we are with our -- with Lidoderm and the elements that underpin Lidoderm and its patent protections and the workings of the strategy that goes through that across that product line.

Again, I think the use of Lidoderm in PHN, I think the use of topicals such as Voltaren gel and, again, that with the way health reform is going to be looking at more alternative ways of delivering care to more patients, I think we're well positioned in using these topical types of delivery systems. And again, we also are bullish about the delivery technology of implants. Whether that's directed against the pain, that remains to be seen. But all of this I think speaks well to where the Company is positioned. Again, I can let Caroline give a little bit -- or Ivan, a little bit more color as to where Lidoderm is in its either legal or patent issue. Go ahead, Caroline, if you want.

Sure, John. Thanks for the question. To answer your specific question, we don't currently anticipate any other P4 filers on Lidoderm this year. We have no knowledge of any coming down the pike. As you know, we did receive a P4 from Watson earlier this year. We have sued them and that lawsuit is moving forward.

We did additional patents to bolster the IP estate around Lidoderm as part of our overall strategy to protect the brand and we do intend to enforce those against any infringers and view them as a valuable addition to our patent arsenal.. And of course we intend to pursue all available regulatory pathways in defense of Lidoderm along side of our legal strategy. So Ivan, do you want to comment on that.

Once again, I think we said this previously, but we certainly believe there's a strong reason to expect a generic to have to demonstrate both clinical efficacy and safety bioequivalence in order to come to market and, back in February there were a couple of sort of sound bytes that sort of I think were entirely consistent with our position.

Margaret Hamburg made a statement that they needed -- the decision should be evidence-based and science-driven and similarly in February, there was in the Feb 2010 issue of the American Associated of Pharmaceutical Scientists, FDA stated that the PK approach could not be used for locally acting drug products. So as I said, once again, we feel that the position we've always had is a very strong one and we do believe that they will need to undertake efficacy and safety studies to bring a product forward.

Okay. And then just a follow-up on Fortesta. Lilly has obviously entered into an agreement with a non-touch, high concentration, 2% testosterone product. Can you help us just understand especially in light of them have the PDUFA in the fourth quarter, what some of the differentiating features that you might have relative to the data that Lilly has and could potentially be commercially launching in the back half that would help you to potentially sell Fortesta relative to the-- not only commercial products that are low dose products but against the one that Lilly's in-licensed.

So, John, I think it sort of -- once again, this validates our decision to move into the testosterone space. And I'm not going to comment on Lilly's data per se. I think clearly Fortesta for us represents second generation gel. It's highly potent. It's got advantages, Dave stated earlier, from a convenience standpoint. That together with AVEED which has sort of compliance advantages, not just from blood levels but because of the way it's given in the healthcare practitioner's office. Also compliance potentially from misuse, abuse standpoint. Really as I said, we believe this validates our position.

Thank you.

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

Your next question comes from the line of Chris Schott from JPMorgan. Please proceed.

Great. Thank you. Just a couple quick ones here. Just first to follow up on Corey's question earlier, sorry if I missed it but what percent of your revenue at this point comes from Medicare, just kind of thinking about 2011 and then the second question is can you elaborate a little bit more on the gross margin trend for the year. Q1 was strong relative to your guidance. Just looking for a little more color on the quarter and what we should expect for the remainder of the year and then I just have one quick follow-up from there.

Sure. So with regard to revenues, on our overall book of business Medicare book of business is about 30%, 35% of total revenues. We don't actually break that down product by product, but that's a rough rule of thumb for how to think about that. As we see the quarter, as we see the year continue to unfold, we don't provide quarter-specific guidance, but I do believe that the full year thesis remains very much intact in terms of revenues in the $1.55 billion to $1.60 billion range.

We are likely to see some gross margin compression over the coming quarters. That is in large part a function of Opana ER, where we finished royalty holiday in the middle of this quarter and royalty rates will tick up commensurate with our sales for the product. The product is doing very well. And so in that regard, it's a good problem to have. From an operating expense perspective, we've signaled that for the full year we expect SG&A and R&D to be roughly comparable to 2008. So you'll continue to see expense constraint with regard to operations.

And this will be the third consecutive year in which Endo has reduced year-over-year operating expenses as a percentage of revenues and I think that goes to both the resiliency in the business, it goes to the leverage that we have at our disposal to optimize our core operations and to the flexibility in our cost structure. Income taxes will be between 32% and 33%, reflecting some state tax savings and. NOL utilization in all of that results and reconfirmation of our adjusted diluted EPS between 315 and 320 for the remainder of the year.

Great. Thanks. Just one final one. On the business development side, I know timing's always hard to predict here but just elaborate a little bit more on what the hurdles are at this point to closing deals. Is this a matter that prices come up to a level you're not comfortable with? Are you seeing sellers not want to engage as much until evaluations recover. Is this an issue just of not quite finding the right asset at this point? Thanks.

The opportunities are there. Certainly a diverse look that we have. I think we're not seeing any issues on the pricing side that makes us uncomfortable. I think the elements of our abilities to engage and sort through, I think you find like in any purchase process, you have to get in under the hood and, again, some of the assets have issues that we just can't rationalize.

But the numbers are not an issue either in the numbers of opportunities we look at, nor are there issues relative to the price. I don't think we have any limits in either area. I think we have a diverse internal organization today that is much stronger so we can parallel more in terms of processing these opportunities, and we continue to push ahead. Again, I don't see any issues and I see, again, in 2010 we'll be there.

I think just from a strategic perspective, just to add to what Dave has said, we have a number of considerations. When we look at opportunities, we certainly have a predisposition for products with on market revenues in order to further diversify our top line. We would like to get Lidoderm below that 50% mark by making it a smaller relative portion of bigger top line.

But importantly, we've continued to grow the brand year-over-year. We look for deals that are synergistic, be it in the pain space with our commercial infrastructure, where we can put our field force capacity to good use, or where we can leverage our contracting capacity, which has allowed us to meaningfully move market share for products like Opana and Voltaren gel. In the urology space, it really is around continuing to build out critical mass.

We look to be financially disciplined in the deals that we'll do, so we look for accretive transactions and we think that for what we are seeing in terms of deal flow in the marketplace, that those opportunities are readily there. So I think at the end of the day, our buildout strategy countenance, not only the organic growth from a strong core set of operations, but attractive acquisitions that will enable us to turbo charge that growth. It's not our expectation that we would do a bad deal as part of our growth strategy.

Thanks very much.

Thanks. Can we go to the next question, please.

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

Yes, thanks. I'll just ask a couple of very quick ones. First for Alan, on the guidance that you provided and reiterated. What does that equate to in terms of a free cash flow target for this year? For Dave, can you talk -- or for Caroline, can you talk about why you would be confident there wouldn't be an Opana ER at risk launch this year? And finally for Dave, on AVEED, are you still committed to the product if you have to do a second or an additional Phase III and has there been any communication at all with the agency on that topic? Thanks.

So why don't I -- thank you very much, David, for your question. Why don't I take the first one with regard to free cash flow. You did see in the quarter about $112 million in -- I'm sorry, about $110 million in cash flow from operations. Previously indicated that we would expect cash flow from operations to be in the $300 million to $350 million range. We're certainly tracking at the high end of that.

And I would expect from a cash flow perspective, that's where we would end up. From a free cash flow perspective, that obviously would have to take into account expenditures that we might have for business development transactions and the timing and the size of that are fluid. So I think cash flow from operations is a better core metric for our -- the resiliency of our core operations. Caroline?

David, thanks for the question. On Opana ER, the settlement we recently announced with Teva bar did eliminate one of the P4 challengers in this complex portfolio of litigation and eliminated a degree of uncertainty which we believe will assist in retaining the exclusivity of our Opana ER franchise.

Of course, we're going to continue to evaluate our options with regards to the P4 litigation around Opana ER and do what's right for our business which includes continued investment in the brand and evaluation of select patent settlements to protect the value of the franchise as well as the continued pursuit of additional patents that if issued are not covered by any of the patent settlement agreements or the current litigation.

To AVEED, I think the areas as we look out into the future, I think the injectable form, the long-acting form will really fit into the market, as we really look at wellness and the ability to manage age and I do think the endocrinology field, the use of hormone management is being better understood. I do think that the injectable gives a much more regimented as well as medically supervised and I think that will allow AVEED to be a more of the longer term player.

So I think what we do know is topicals today have the market, but I also believe that over time there's going to be better understanding and the compliance aspect. Now, the question of how we see the regulatory aspects unfolding, we, again starts with do you believe in the product? And yes, we do. And we think it's one that will have a future. To that end, I can never handicap where the agency is going to be. I do believe we have a very strong filing in support of elements on the drug, its safety and its utility in the marketplace. So, until the meeting's completed and we understand it, but we believe market-wise it just makes a lot of sense and we're standing behind it.

What's also important to note on AVEED is a patent is going to issue on May 18th of this covering the formulation that expires in March of 2027. When approved, the product has legs.

It all plays again to where we see our future. It's a very strong opportunity and another, again, addition to our pipeline.

Just to follow up on AVEED, I mean, the meeting with the FDA it does come down to their view of safety, correct, in terms of convincing them?

Ivan?

Yes. It's sort of it comes down to benefit/risk discussion and our perspective is that we believe we can hopefully find a pathway forward that they agree to where the benefit/risk balance is strongly in the favor of the drug and that's a discussion we're going to have with the division.

Great. Thank you.

Thanks, David. Can we go to the next question, please.

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

I think I like Nash better than Nachman.

You can change it. It's no big deal.

My first question is a follow-up for Alan on your SG&A comment before. What are those levers that you have? Where have you been cutting back over the last few quarters because SG&A has slowly ramped down and how much more flexibility do you have over the course of this year?

So I think there are a variety of levers that are at our disposal. A key component in our cost structure is a variable component with regard to our field course, the contract sales force, we're able to either dial that up as the promotional needs require or dial that down. We've also been looking at new promotional response models that are now in place.

That allows us to have a much clearer understanding of customers, both by geographic orientation and by plan, and allow us to better target the use of field force or advertising and promotional expenditures and investments in support of that. We've further calibrated our targeting to understand the opportunity set from doctors that are receiving calls from our sales reps. And the promotional response model allows us to get more from the investments that we're making in that commercial space and to maximize the benefits of our contracting strategy.

So net-net, I think there are a number of levers in that promotional mix that are dynamic and that we look at as our business continues to grow. A good example of that is the targeted direct to consumer advertising in Voltaren gel, which is the kind of investment that we think of as a trade-off relative to others to further build the brand.

Okay. Have you thought about restructuring your core sales force at all, not just the contract sales?

Well, I think for the business as a whole, we're always looking at opportunities to enhance the efficiency and the effectiveness of our core operations. We think to the extent that there's capacity in our sales force, there are opportunities in the business development space to absorb that capacity and that would be a real win-win for us.

Okay. And then a follow-up on the M&A discussion. Is the market fruitful in all the areas that you talked about, whether it's pain, urology, devices, diagnostics, where do you see the most opportunities now? I know you're looking at all of them but where do you think you're spending most of your time?

Again, I think they're really broad across all waves. I think the aspects of health reform and the way -- and I keep talking about this, the sense of healthcare delivery, the health delivery system is going to change the business models and I do think diagnostic opportunities, device, generic as well as branded.

Now, the element that I think fits well as we look at the continuum of care, and we look at (inaudible) , Alan looks at the way the agency is both looking to apply fees to various parts of the industry and require greater regulatory trials in all parts, certainly notable is in the device section. We think we have that skill set that allows us to be a valuable adjunct as either a partner or a discrete player in the device area. So again, we have a generics arm and we look to add areas in that field.

So we're not I think limited at all and I do think we have some discrete and specific advantages, both from the standpoint of our own economics and cash flow of the business, but also from the critical core components that can be applied to some of these assets that maybe in the past didn't need to be applied but today they are more prevalent in the new

Are you considering other legs to the stool of the therapeutic areas, areas that you're not currently in part of them.

I think we always do. Look at, the opportunities and where we're focusing, I stress again, we want to move where we think there's going to be a more-- a larger play. I think the procedural list and the use of technology grew the procedural list in middle and evasive technology, convergence in that area because it's really in that field that you're going to get best outcome and I do think best outcome is a delivering aspects of all technology platforms. So from that standpoint, we're strategically leaning that way and it's driven by the fact that there's multiple solutions in order to get that best economic advantage. So I don't -- again, don't see us having any limitations and I do think we're well positioned to play in this new game.

Okay.

Thanks very much, Gary In the interest of everyone's time I think we have time for one more question.

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

Thanks. Just a quick one on SUPPRELN, can you say how many patients are on drug now, what kind of growth is that over year-ago period and where do you see that product going forward?

We are very pleased with the growth in SUPPRELIN itself. We have see continued growth in market share for the product itself coming from a combination of parent comfort and physician confidence in the use of the product. We've seen market share grow from roughly 39% at the end of last year, to about 42%, 43%.

And we continue to expect to see market share growth in the physician patient population. It's a fairly stable market with roughly about $120 million in overall sales, but we think that over time we can continue to grab market share. We're working with the Magic Foundation to increase parent awareness on this, and we think that there's some attractive opportunities to continue to grow volume in that space.

Thanks .

Ladies and gentlemen, that concludes our question and answer portion of the call. I would now like to turn the call over back to David Holveck for closing remarks.

Thank you and again, thanks for the questions. I think the questions are a valuable part of this exercise. I think it does for us allow us to draw I think a better line forward as to how we see Endo progressing and also evolving and I also, again, think your questions highlight the elements that we're focused on. And it is certainly in the diversification and then looking at areas where we can have the greatest near term impact and growth.

BD is clearly one that will continue to be a point of focus, but I don't want to discount, again, the core pipeline we have, nor the core business units that we have, the focus and the demonstrated success we've had over the last year and-a-half in terms of taking this business through a transition, and showing its benefits in the metrics of real growth and cash revenue generation. So on that, I look forward to our second quarter call. Again, I think it will be one that will show good progress in all areas that we think are going to be valuable to shareholder value creation. So thank you very much.

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