Endo International PLC (ENDP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Endo Pharmaceuticals earnings conference call. My name is Michelle, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a Question and Answer Session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Blaine Davis, Vice President Corporate Affairs. Please proceed, sir.

Thanks, Michelle. Good morning, everyone, and thank you for joining us. With me on this morning's call are Dave Holveck, President and CEO of Endo, Julie McHugh, Chief Operating Officer, Dr. Ivan Gergel, Executive Vice President of R&D, and Alan Levin, Executive Vice President and Chief Financial Officer. After our prepared remarks we'll open the call to your questions. I would like to 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 then maybe different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's current report on Form 8K filed with the SEC for Endo's reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning. Now I will turn the call over to Dave.

Thanks, Blaine. I'm very, very pleased with the state of our business today. We had a very good second quarter with robust revenues and effective expense management and as a result we are raising our adjusted earnings expectations by $0.05 per share for the full year. Al will comment further on guidance and cover the full financial story in a few moments. In addition, our business development efforts are continuing to gain traction and our product pipeline is advancing towards potential approvals.

At the same time our industry is changing and we must work harder and smarter to position Endo for growth in this dynamic environment. I believe our hard work is beginning to pay off. Our diversification beyond pain products going into urology, oncology and endocrinology is enabling us to become a full service provider of healthcare solutions. Today we offer not only branded and generic drugs but also devices, diagnostics, and medical services. In this changing healthcare environment, we believe that economics, outcomes, and access are critical areas of focus that will accelerate our growth.

Endo's recent strategic acquisition of HealthTronics reflects this new approach to building our business. HealthTronics is the leading urology service company in the US. The deal is accretive to Endo on adjusted basis and fits very well with our existing urology franchise. HealthTronics helps diversify our revenue stream, increase our access to urologists and puts Endo on a path to become the premier provider of care in urology. That's a very exciting opportunity for us and a goal I believe we can achieve.

At the same time we're making good progress developing our late stage pipeline and advancing new product candidates towards registration. In a moment Ivan will give you an update on our progress with Fortesta, AVEED, Ocreotide Implant and other R&D programs. In summary we're executing our business strategy well and accomplishing our goals for this year. I believe we're on the right path to sustainable, long-term growth and to becoming one of our industries premier providers of comprehensive healthcare solutions. As we continue to look beyond traditional pharmaceuticals and integrate new technologies and products, we are aligning our company with physicians and payers to improve the treatment in management of patients. And ultimately, improve the quality and cost of those desired outcomes.

We are committed to finding new ways to grow our business that fit in the changing healthcare environment and will enhance our revenue growth. I look forward to bringing you more exciting announcements about our company and plans for growth in the future and now I will turn the call over to Julie to review our recent commercial highlights. Julie.

Thanks, Dave. I would like to reiterate Dave's comments regarding the exceptional business performance this quarter. I have had four months now to examine our current investments, the opportunities ahead and very am excited about potential for growth. I will begin with a quick comment on the recently completed HealthTronics acquisition. This deal will enhance the healthcare solutions we offer urologists, diversify our revenue base and start driving additional revenue this year. HealthTronics has a strong, profitable and growing business which includes treatments for prostate cancer, BPH, and kidney stones as well as pathology services for the detection and diagnosis of cancer and other conditions.

We're pleased with HealthTronics' results for the year-to-date and we're making investments to maintain and accelerate growth. As an example, we have now trained a small group of the Endo urology sales force to sell lab services to the urologists that we call on today. As a reminder, HealthTronics laboratory solutions offers pathology services including prostate biopsy, and urine [psychology]. Tests that are part of prostate cancer and bladder cancer care pathways. Two diseases where Endo is committed to improving patient outcomes.

Additionally in our urology and endocrinology business, SUPPRELIN L.A performed extremely well and exceeded our expectations. We have been working closely with patient support groups to increase awareness of this innovative drug device. SUPPRELIN LA is becoming the first choice in treating central precocious puberty and sales are up 67% over the second quarter of 2009.

Let me move onto make a few comments on VALSTAR. As a reminder, we launched VALSTAR in the third quarter of 2009 to a very receptive physician and patient audience. Net sales of VALSTAR for the second quarter were $4 million. Again, bladder cancer is an area of investment for us and the launch of VALSTAR is an example of our committment to this therapeutic area. However, the manufacturing process for VALSTAR is complex, and we recently notified physicians that due to challenges with the manufacturing process and the increasing demand for the product, we are experiencing a shortfall in availability of the product. We're working closely with our manufacturing partner and the FDA to bring the product back up to full supply levels and hope to achieve this during the third quarter.

At the same time in our pain business we are redesigning our sales model to make our salesforce stronger, more flexible, and a better partner with physicians, payers and providers. Endo has been operating in its core pain business with both specialty and primary care sales groups that call on our customers. We plan to combine these teams into one pain salesforce that we believe will be more efficient in calling on physicians and more flexible in managing the size and scope of our sales effort. We believe the result will be a more efficient selling model where reps will have responsibility for all targeted physicians within a specific territory. In addition, the targeting for each territory will be based on managed care access to enhance the value of direct promotion.

Implementing this change will result in a reduction in the size of our current salesforce but at the same time we will expand the presence of the contract salesforce. The rationale for the change is not about short-term cost savings which will be modest this year but rather a reconfiguration that will produce a more flexible salesforce and is intended to help Endo serve our physician customers better, now and in the years to come. The salesforce changes will be implementing in the second half will enable our current portfolio to remain strong. Our core business continues to deliver year-over-year sales growth as a result of continued promotional support as well as the impact of our contracting strategies.

Net sales for the Opana franchise grew 34% versus the year ago quarter driven by strongs prescription growth for Opana ER of 28%. Prescriptions for Voltaren Gel continue to perform well posting a 37% year-over-year increase in the second quarter. Lidoderm is also performing well with net sales and prescription demand both increased slightly versus the second quarter of 2009. During the second quarter we reached an important settlement agreement with Impact Laboratories that will enable Endo to provide Opana ER as a therapeutic option to patients through January 2013. This settlement agreement covered a set of dose strengths on which Impact Laboratories holds first to file rights. Collectively these strengths represent the vast majority of Opana ER net sales.

In addition, sales of the immediate release version of Opana continue without generic competition, a nice upside to the franchise performance this year. We believe the Opana franchise will continue to be an important growth driver for Endo and contribute significantly to our revenues over the next few years. We remain encouraged by the performance of our core business and I look forward to providing future updates on our care pathway approach that we believe will create a better opportunity to improve outcomes and accelerate our growth. Now I will turn the call over to Ivan for an update on R&D progress during the quarter. Ivan.

Thanks, Julie. We have been making great progress with our R&D portfolio, and I will discuss a number of development goals that we have hit as well as some upcoming milestones. Last month we filed a Class II complete response to the FDA's comments on our application for Fortesta. Our reanalysis of the Phase III results was consistent with our previous analyses. FDA has deemed our complete response. Our response complete, and this December 30, 2010 is the [PDUFA] date for their decision. We believe Fortesta is a very convenient and important therapeutic option for patients with low testosterone and that it will be a very successful product for Endo.

During the second quarter, we met with the FDA regarding the path forward for AVEED, our long acting injectable testosterone, and we're currently considering the outcome of that meeting and our next steps. Our pivotal study for Ocreotide implant for acromegaly is now fully enrolled and we look forward to reviewing data from this multi-center international trial by the end of this year. We're very encouraged by the progress to date and believe that if the final results are positive, we should be in a position to submit an NDA in mid-2011. As a reminder, Ocreotide utilizes the high drawn drug delivery technology and is another high potential product for Endo. The product was granted [inaudible] drug designation and may qualify for seven years of market exclusivity upon approval for acromegaly.

We're also preparing to initiate a launch study with Urocidin in the second half that could become the pivotal study of this very interesting product to treat bladder cancer. Urocidin is a novel treatment for bladder cancer which represents the type of innovative solutions we want to offer urologist and their patients. As Julie stated earlier, we're committed to bladder cancer as an area of therapeutic focus as we look to enhance the range of solutions we can offer to urologists. We're currently evaluating data from the first of two Phase III studies of Urocidin and expect to finish our analysis this quarter prior to initiating the second Phase III study.

You have already heard a lot about our acquisition of HealthTronics, so I will simply add that I believe this acquisition represents a great opportunity to bring innovative diagnostics, devices, and therapeutics to the urology community to improve patient outcomes. Prior to our acquisition of HealthTronics, we hired some seasoned and skilled senior managers to lead R&D efforts in a device space and with the HealthTronics acquisition complete, we have started to collaborate with the HealthTronics team to see what new products and services we can develop together. We intend to take the same virtual approach to device development as we have in pharmaceuticals. It is a model that will allow us to quickly shift resources to advancing programs that are demonstrating opportunity and it increases the likelihood of positive outcomes for physicians and their patients. I am very pleased with the progress we are making with our collaborations in early stage discovery and development programs, and I look forward to having more to say about these programs as they mature and they approach clinical testing. And, now I will turn the call over to Alan to review to financial results for the second quarter. Alan.

Thank you, Ivan. Endo had a strong second quarter and a good first half from a financial perspective. As we evaluate the prospects for the full year, we remain confident in our previously stated revenue guidance of between $1.63 billion and $1.68 billion. We expect that continued strong performance in our core business, the closing of the HealthTronics acquisition in early July, and continued cost containment initiatives will improve adjusted diluted earnings per share versus previous guidance.

We now estimate adjusted diluted earnings per share in the range of $3.25 to $3.30 this year, up $0.05 from our previous guidance range. Reported or GAAP diluted earnings per share are now expected to be within the range of $1.99 to $2.07 this year. For the second quarter of 2010 we had total revenue of $397 million, up 6% over the second quarter of 2009. For the six months ended June 30, 2010, we had total revenue of $761 million, up 7% over the same period of 2009. Lidoderm, our lidocaine patch, indicated for the treatment of the pain of post-herpetic neuralgia have a solid quarter as Julie discussed earlier. We continue to expect low single-digit growth for this franchise in 2010 driven by a combination of script growth and the modest pricing benefit.

On an adjusted basis, gross margin was down 2.4% to 77.3% of revenue versus 79.7% during the second quarter of 2009. The decline is driven primarily by the year-over-year increase in the royalty rate on the sales of Opana ER and is in line with our expectations. For the six months ended June 30, 2010, adjusted gross margin declined to 78.1% of revenue versus 79.4% during the same period of 2009. For our core business we continue to believe that for the full year adjusted gross margin as a percentage of total revenues will decrease by two to three percentage points relative to 2009. The addition of HealthTronics with its relatively lower gross margins but consistent operating margins relative to Endo's core business will further decrease adjusted gross margin as a percentage of revenues.

In total, with the new consolidated Endo Pharmaceuticals we expect adjusted gross margin as a percentage of revenues to decrease approximately three percentage points relative to 2009. Total reported operating expenses for the quarter were $196 million. However, on an adjusted basis, total operating expenses for the quarter were $158 million. This total comprises selling, general, and administrative expenses of $129 million and R&D expenses of $29 million.

Together these items were comparable to prior year adjusted total operating expenses of $157 million. Total reported operating expenses for the first half were $360 million. However, on an adjusted basis, total operating expenses for the first half were $312 million. This total comprises selling, general, and administrative expenses of $258 million and R&D expenses of $54 million. Together these items increased 5% versus the adjusted total operating expenses of $296 million during the first six months of 2009 with growth driven primarily by the impact of incremental investments in R&D to advance our pipeline projects.

Second quarter adjusted net income was $95 million, up 10% over $86 million during the second quarter of 2009. Our reported diluted earnings per share increased to $0.44 versus $0.26 in the second quarter of 2009. On an adjusted basis, adjusted diluted EPS increased 11% to $0.81 versus $0.73 in the second quarter of 2009.

For the six months ended June 30, adjusted net income was $182 million, up 10% over $165 million during the same period of 2009. Our reported diluted earnings per share increased to $0.95 versus $0.59 in the first half of 2009. On an adjusted basis, adjusted diluted EPS increased 10% to $1.55 per share versus $1.41 per share in the first half of 2009.

Our adjusted effective tax rate for second quarter 2010 was 33.7% and benefited year-over-year from a reduction in certain state income tax liabilities. For the first six months of 2010 our adjusted effective tax rate was about 33%. We continue to expect our adjusted effective tax rate to be between 32% and 33% for the full year.

Endo's strong balance sheet and available liquidity was recently bolstered by the repurchase by UBS of all eligible auction rate securities for price equal to original par value plus accrued but unpaid interest. This was expected for the terms of our previously announced settlement agreement with UBS, but it is worth noting that these funds are now available to us as cash to further support our business development activity. One additional note on the business development front is that we continue to negotiate with Medical Enterprises Group, developer of the Synergo system for the management of bladder cancer and have extended our exclusive right to negotiate through December 31 of this year.

Endo repurchased $21 million of its stock during the second quarter and approximately $50 million on a year-to-date basis. We plan to repurchase additional shares this year. However, the magnitude of additional share purchases will be determined by the scope and pace of business development activity. Overall, we had a strong second quarter with our base business now expected to generate $350 million to $400 million of cash flow from operations this year which helps to finance our business development activities thereby still further diversifying our business. The solid cash flow is an excellent example of the performance of our core business. This concludes my prepared remarks, and now I will turn the call over to Blaine.

Thanks, Alan. I would like to turn it back to the operator and open up the call to your questions.

Thank you. (Operator Instructions) Your first question comes from the line of Richard Silver of Barclays Capital. Please proceed.

A couple questions. First of all, maybe you could offer some thoughts on the recent ad com for REMs and opioids, and then the second question relates to quarter to quarter volatility that we have seen on the revenue line and maybe give us some sense of whether there has been any impact from inventory levels, customer buying, just because it is a little bit difficult to forecast. Thanks.

Richard, thanks. This is Ivan. So you're referring of course to the two-day meeting that was held last week on the REMs coming up with sort of a REMs guideline for the opioid class. It was an interesting meeting. I think it is an area that we have been very, very much involved in.

We're very much committed to. We're part of the industry working group and clearly we're working closely with FDA on that. I think -- I've said this before but we clearly have been very much involved from the early days. We have a risk map in place which is pretty extensive and which we worked out with FDA. We believe it is important to have these REMs programs go forward but we also believe it is critical that patients have access to pain medications.

To your question, Rich, with regard to quarter to quarter volatility on the revenue line. There is some movement from one quarter to the next in our revenues. We tend to see the first quarter as a slower quarter for us. The latter part of the year we tend to perform a bit better.

I will say that we're really not seeing any impact at the wholesaler level in terms of inventory levels. They're pretty comparable to inventory levels at quarter over quarter basis over the prior year. At any point in time you may see some modest movements in retail inventory levels from one quarter to the next, but we generally tend to find that those even out over the course of the year.

Thanks very much.

Thanks, Rich. Go to the next question.

Your next question comes from the line of Gregg Gilbert of Bank of America/Merrill Lynch.

Just a couple. First for Julie, do you have any data or at least some anecdotes to share that support the synergy of owning HealthTronics under the Endo umbrella at this stage?

Well, thank you for the question. I don't other than -- I don't have any facts for you at the moment, but anecdotally I will tell you that at the recent AUA meeting which is the big national meeting of the American Academy of Urology, it was very clear that at that meeting Endo was being recognized as a clear leader in providing services to urologists and that the recent acquisition of HealthTronics was viewed very favorably by the urology community, so I can tell you that the market reception to the acquisition has been very positive.

I also believe that as I pointed out in my prepared remarks that we have some real short-term opportunities to continue to drive accelerated growth on the top line, and I mentioned one of those which was the co-promotion of our Endo sales organization on the HealthTronics laboratory solutions business, so we're continuing to explore other potential upsides, and we'll be reporting out on those as we move forward and integrating the business.

Thanks. And I have one for Alan. Alan, what sales of profit contribution do you have in there for HealthTronics in your ranges and a bigger picture financial question, has the increased availability of capital we have seen of late for LDLs and recapitalizations changed your approach to business development at all? Thanks.

So thanks for your questions, Greg. First of all with regard to HealthTronics, when we originally announced the transaction, we talked about $80 million in revenues from HealthTronics, and we talked about approximately $0.05 per share in EPS accretion this year. We have seen an earlier than expected close from HealthTronics, so I think it is safe to say that revenues will be north of that number, and an increase in revenues is incorporated from the HealthTronics side that increase in revenues is incorporated in our current guidance range of $1.63 billion to $1.68 billion.

We will do a bit better on the EPS side as well, and that was one of three factors that's associated with the increase in our earnings guidance, the other being the core business which continues to perform well as well as some cost constraint in our expense base. With regard to capital markets, we do -- I do agree with you. I think the capital markets are pretty robust. Our strategy with regard to business development remains very consistent. We are very much focused on opportunities to diversify our revenue line and to enhance economics, access and outcomes for patients and payers in connection with how we think about building out the business.

That really means that we'll continue to remain focused on revenues with a preference for on market products that help us diversify our business faster, from a financial perspective we look at for attractive properties. We look to be financially disciplined in our decision making for transactions that can be immediately accretive given the low cost of capital today. We look for synergistic opportunities, and you saw that in the urology space with HealthTronics. I think very indicative of building out our top line, adding lithotripsy, laser therapy for BPH, laser therapy for prostate, cryo therapy for prostate on top of our drug offerings in VANTAS and VALSTAR.

In the pain space it is really around commercial infrastructure, and being able to leverage our managed care contracting capabilities which have moved market share for products like Opana and Voltaren gel, and as well as Julie mentioned we continue to look at efficiencies in our field force capacity and effectiveness and that frees up capacity for additional detailing. I think we've got a very strong balance sheet. We've got about $900 million of cash on hand now that the HealthTronics transaction was closed, and I think that that coupled with broad access to multiple pools of capital will keep us focused on a variety of transactions and our expectation is that we will continue to execute in the business development space over the remainder of this year. Ivan, is there something you--?

Yes. Absolutely, Greg, so I think the other area where there is definitely opportunity to sort of recognize synergies is with our R&D team working very closely with the HealthTronics team. We're starting to look at their diagnostic capabilities, some of their device treatment capabilities, starting to think about ways to bring those forward as next generation devices as well as ways that we can sort of bring this all together to sort of create better outcomes for sort of patients and healthcare providers.

Thank you.

Thanks, Gregg.

Your next question comes from the line of Annabel Samimy of Stifel Nicolaus. Please proceed.

Thanks. Hi, it's Samimy thanks. So, you actually gave a pretty comprehensive response to the question about business development, but now that you have Indevus that brought you into urology and oncology you have HealthTronics that got you in devices and diagnostics, can you take a pause and really start to just develop internally and organically rather than just go out and continue to do business development? Are you in a position that you can actually work on the things that you have or do you need to actually continue to go out and do more business development and acquisitions to be able to build on this?

It is a good question, and directly speaking because I am not going to get specifics, but directionally we still want to be able to go after some additional aspects of the strategy and the directions. As Alan had talked about, we have the ability to do that. I do believe that in this changing environment, specifically the health reform which is putting more pressure on diversification, I think in diversification they want to see better economics, better access, and certainly better outcomes I think we've diversified but I am not sure that the breadth and depth of the positions that we staked out, those can't be further enhanced.

Now, having said that we have established that architecture, I think organic growth is fairly critical, and that's the other part of your question. To Ivan, and I will let him address a little more on the details, but when you talk about the ability now to take organic growth one step further, with the device, the drug, the generic arm which again fits nicely against the delivery technology we have with the implants, those are all areas where we feel that organic growth can come from and come from in a timely manner, of course intervention is always something that is difficult if not impossible to schedule, but there is no question that with the diversity of the framework that we have, we can take some bets on the long-term and the pharmaceutical but we also can accelerate and look at either diagnostics or devices, but, Ivan, you may want to chime in a little bit here.

Thanks, Annabel. I think it is a great question. To add to what Dave said, I think we have got a huge amount starting to go on organically. Clearly it has been a productive first half from a pipeline standpoint. I spoke about Fortesta, our next generation 2% testosterone gel. We have got Urocidin data we're expecting very shortly. We've just -- we're starting to wrap up the Acromegaly program with the Hydron implant. We have eight discovery programs which are evolving quite significantly.

We've started to initiate some organic device R&D components, and we spoke about how we're working closely with the team at HealthTronics to do this. Clearly the implant is a whole new platform that we're working on, several programs going into various stages of production in that area, and I really think the amalgam of putting drug and device people together is going to lead to very significant breakthrough thinking, and we're starting to see a little bit of that happening already, so really yes, we're going to continue with the BD, but there is a huge amount, I believe, going on organically, and we'll be seeing the fruits of that pretty soon.

Okay. If I can ask one more question about the generics platform, so you just had the Mycophenolate product approved, that was launched in March but we're seeing some I guess lower than expected generics business, so can you tell us how Mycophenolate might contribute to your generics business and how does the whole pain franchise float into this generics business given that you've got a few pain products that will be coming off exclusivity or patent exclusivity over the next few years?

Well, thank you, Annabel, for that question. Let me respond. I will tell you that I think we're very excited about our emerging specialty generics business. We currently have eight products on the market, 14 pending FDA review, and another 40 in development, and quite a, one of our key focuses in the specialty generics business from a therapeutic area point of view is in pain. Our intention it to develop a very broad pain portfolio so that as our products reach the end of their patent protected life that we'll be able to offer them -- continue to offer them as branded products but also build out our specialty generics business against not only our patent clips but others as well.

Again, it is a key therapeutic area of focus for us in specialty generics, and we're excited about the progress that we're making. Now, one of the realities is -- of our generics business is we're facing into a head wind at FDA. The backlog at OGD is very significant and is growing, and so we will be working with parties in Washington to try to address that issue because we believe that patient access to generics products is very important, and we'll continue to be increasingly important in a post healthcare reform world, so we're excited about receiving the Mycophenolate approval. We look forward to launching the 500-milligram strength, and we anticipate that it will add some revenue this year, but certainly not significant in terms of the overall business. Although looking again the whole strategy going forward is to have a substantial and relevant portfolio so that we can really realize high growth from that specialty generics business.

Thank you.

The only other thing I would add is that I think the year-over-year comparisons in the generics business suffer from a difficult comparison with 2009. We did see in the first half of 2009 a disruption in supply for a competitor controlled substance and so we saw unusually high levels of sales for both Endoset as well as morphine sulfate last year, so the year-over-year comparison reflects that. When you adjust for that, we actually think our generics business is performing quite well.

Thank you very much.

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

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

Yes, thanks for taking the questions. Just a couple of quick ones. First on SUPPRELIN LA, I guess for Julie, where do you think you are in terms of the penetration level of that product and you talked about the shortage of VALSTAR. What's the risk that that shortage persists I guess beyond the third quarter? And then just one for Alan. Any price increases during the quarter or after and on the generics business do you have the ability through your settlement on Oxycontin to come into the market in 2013? Thanks.

Well, David, thank you for your question. Let me start by commenting on the SUPPRELIN LA performance. We don't think we have reached market, full market penetration on SUPPRELIN LA. We are currently the second largest product with approximately about a 34% market share. We believe that we could be the market leader in this category, and we continue to progress along that expectation and that goal.

With respect to VALSTAR and the current short-term supply interruption, we do see it being just that, that it will be a short-term supply interruption and we'll be able to get VALSTAR back into full distribution in the third quarter. One of the things that we're doing to ensure that we don't have these interruptions in the future is we are seeking to develop sequential batches of VALSTAR so that we can ensure ourselves that any process challenges we face in the future that we've anticipated that and have defined safety stock sufficient with growing demand of the product, so we don't think it will be a future problem for us, but of course we're going to continue to be very diligent in addressing the current situation and ensuring that our processes are robust so we don't experience any interruptions in the future.

And then, David, with regard to your questions on price increases, we did take a 1.5% price increase for SUPPRELIN at the start of the second quarter, and just recently a 7% increase in the price of Percocet. With regard to Oxycontin, yes, we do believe that after the patent expires pursuant to our settlement agreement we would be able to enter the market at that point in time.

Okay. Thank you.

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

Your next question comes from the line of John Boris of Citi Investment Research. Please proceed.

Congratulations on the quarter and just a couple product related and then one financial question. On the Fortesta PDUFA date can you just contrast your 2% Fortesta product with that of the Lilly 2% Axeron product? I think they have a PDUFA date of November 29. Can you just give any commentary about how you will be ready to potentially launch the product and the differences? One seems to be a touch product, the other a non-touch product, and how you think you will be positioned there in the market and then one question for Alan just on the tax rate. I think you did indicate that there are some NOL benefits related to the HealthTronics acquisition. Can you quantify what those are and are they in addition to the 32% to 33% rate that you are giving for tax guidance or are they excluding that? Thanks.

John, this is Ivan. Regarding Fortesta, as I said, it's both are next generation testosterone products, I will talk about Fortesta. Clearly we're very excited about it. It is our next generation product. It is a 2% gel that will make if the most potent gel on the market which obviously translates to being applied over a smaller area which makes it more -- we believe makes it more convenient, and as I said I think that's going to be seen as a significant advantage for the product going forward.

I would like to just add that to your question, John, around the launch preparedness, we're very excited about the upcoming launch of Fortesta pending FDA approval. Just as a reminder the testosterone replacement therapy market is over $1 billion and is growing at a compounded annual growth rate over the past four years of 20%. Topical gels represent about 70% of the total market, and so we are very excited about launching what we believe is the best in class product into this very exciting and dynamic market. We're preparing now for that launch, and we look forward to being able to talk more about it pending FDA approval.

Do you have launch quantities of the product?

We're currently moving in that direction. We are producing launch quantities, yes.

Okay.

John, with regard to your question on tax rate, the NOLs from the HealthTronics transaction are in the area of $5 million in tax benefits. That is incorporated in our current full year guidance of 32% to 33%. I would tell you that what is not incorporated in our effective tax rate guidance is the R&D tax credit. We always forecast based on current law and what have expired at the end of last year, it is very frequently put back in place retroactive, but we have not incorporated that, and so if the credit were reinstated by Congress later this year, that would be a further reduction in the tax credit.

Thanks.

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

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

Thanks. First question, maybe for Ivan, can you expand more on what you briefly said about AVEED and the outcome from your FDA meeting? I will leave it at that if you want to say more about it. It almost sounded as if there was a potential for you guys not to continue the program.

No. I definitely didn't say that, Corey. But, thank you for the question. We met with the FDA in May. We had lengthy meeting with them, and certainly there's -- we have come away and we want to consider the outcome of that meeting, but we will have more information on that later this year.

I think that there is a huge runway on AVEED. The patent goes out to 2027. We've got plenty of opportunity to work with FDA. We're still very much committed to this product. We think it is a very exciting product on a global basis. We hear from our partner, that sales continue to increase and they're sort of close to 2 million patients exposed on a global basis now, so once again we're very much committed to it, and we certainly will have I hope more information later this year.

I will just reinforce that. I think the whole area of hormone therapy, the whole area of age demographics, quality of life, I think we see this market evolving. We see it certainly being relative to both male and female but on the male side the topical, but I also think that as we move further down the line greater understanding of both hormone therapy and injectable, a long acting injectable, both on a compliance basis, just on performance, I think complement it with the topical makes a lot of sense, and we feel again to Ivan's point the safety is there. The abilities to reference that relative to our filing along with the extended patent life we think is a great asset for us and we'll continue to develop it.

Second question, have you guys ever quantified the impact of the healthcare reform on your 2011 numbers and if not, care to do that now?

So, Corey, thanks for the question. What we have said with regard to healthcare reform is that the impact in 2010 is about approximately $20 million on our top line and that's really a function in 2010 of mandated Medicaid rebates for in the fee for service and the managed Medicare space. I think Endo as a Company has been fairly resilient in the face of healthcare reform.

We confirmed our guidance in the first quarter notwithstanding other pharmaceutical companies lowering theirs, and we've increased our guidance this year in the second quarter at EPS. As you look to 2011, the key areas there are really the doughnut hole and the healthcare reform fee. We have not yet provided guidance with respect to 2011. It is a fluid situation, and as the year continues to unfold we'll have a more complete and thoughtful perspective toward the end of this year.

Fair enough. Thanks.

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

David, you're blanking out.

Can you hear me now?

We can hear you now. We got you.

This is Mischa for David actually. So, my question is on Voltaren gel can you talk about how you see the topical NSAID market evolving with Covidien now in the market with NSAID and what you're hearing in the field on impressions on the new products from doctors and patients?

Thank you. Is it Mika?

Mischa.

Sorry. Thank you for that question. Yes. The topical NSAID market is continuing to grow at the expense of orals, and Voltaren gel is disproportionately gaining from that market shift. The Covidien product is really a marginal player with less than 0.1% market share, so we're not particularly concerned about that product. There is some aesthetic characteristics that have limited the initial market reaction to the product, and so we think Voltaren gel is uniquely positioned for continued growth in the market.

Great. Thank you. And then just one other quick question. There hasn't been any update recently on Pagoclone, and I am just wondering if there is any news regarding that product? Thank you.

Thanks, Mischa. So Pagoclone is a sort of novel GABA agent that's been investigated for the treatment of stuttering. There was a large Phase IIb study completed earlier this year, the -- Teva did have rights to it and gave those rights back to us. We will be spending the next few months doing a deep dive into that data. We see it as an interesting product with which we potentially could take forward, but I think we're going to spend a bit more time now looking at some of the data and then we'll have more news on that later this year.

Great.

Just in that regard from a financial perspective, because of the termination of the Teva agreement, as well as our preliminary analysis of the completed Phase IIb study, we did conclude that an impairment assessment was required to evaluate the recoverability of the intangible asset on our books as of June 30, and so what you do see in our earnings report is a $13 million impairment charge in the reported financial results of the Company. Obviously as Ivan has indicated we're currently conducting a more complete analysis and will have comment after that review is complete.

Thank you.

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

Thanks for taking the question. I've got two for you. First, I was hoping you could give a little more color on the next generation Hydron technology and specifically when we might get a little more detail or a little more data? And the second, I was hoping you could give us updated thoughts on your TRF technology and how and when that might be applied?

Okay. So let me talk a bit more about the next generation -- second generation hydron technology. We haven't been specific about the underlying technology. We've had some good news very, very recently inasmuch as a patent implication was recently allowed which covers the technology behind our second generation implant. We have got a reasonably large team working on products, APIs that might be put into that. We've identified four or five APIs in addition obviously to the programs currently ongoing with Octreotide and carcinoid and Acromegaly. So, that whole program, that whole platform will be ramping up very significantly in 2011 now that we have got the patent coverage.

On the question pertaining to tamper resistant formulations, that is an area of interest to us, and we do have some ongoing work in our specialty generics business to develop products with those qualities, especially in the opioid space, so we are interested in those types of technologies, and are working on applying those to our specialty generics portfolio.

As we have said in the past, we do think that TRFs may eventually become a cost of entry from both a regulatory as well as a payer point of view, so we're always evaluating life cycle management plans for our products and that includes our significant investment in opioids.

I think just back to the Hydron, and the second generation Hydron, I think it is a great example of the intersection between drugs and devices and where we're going within Endo, so that's got great applicability for the delivery of potent molecules that you clearly where you want compliance, where you can't deliver them orally, where they've got poor PK, there is really a lot of potential APIs to put into this technology.

Again, we have seen this, again this whole element of economics going forward, and a lot of economics are wrapped around compliance, I think one of the success elements of SUPPRELIN, the 67% that now we have seen as a growth in that product is the fact of the convenience, the delivery, and so this I think futurewise will to Ivan's point enable a variety of drugs. I think Hydron's dynamic range is good, but I think second generation will even be a greater dynamic range of drugs that can be used, and I think again the whole economic question and the compliance aspect can be addressed, so we're excited about this opportunity for organic growth in this area.

Great. I appreciate it.

Thank you.

Thanks, Greg.

Your next question comes from the line of [Irena Ripkine] of Duncan-Williams. Please proceed.

Thanks for taking the call. I was just wondering now that you've acquired HealthTronics if you would be willing to provide more visibility into the performance of the various segments and how you're thinking about which ones are the most apt to grow quickly and also any update that you could provide on the warning letter from that group would be great?

Yes. First of all, the specifics around the whole HealthTronics, they have leadership position in lithotripsy in terms of both their service provider and the mobile as well as in the fixed, well over 60%. I think when you look at the aspects of both cryo in terms of their share and that as well as in the laser both have been very successful, and again have been successful from the standpoint of their approach into that urology channel, and also the mobile aspect.

When you talk about where that fits in terms of some of the growth parameters, for us we see the ability to develop device and enhance some of the equipment because what we're seeing in this greater access post health reform is a greater ability for physicians, or desire for physicians to work through ambulatory surgical centers, have access to high tech products and devices, equipment, so the mobile aspect is a considerable one and they have a leadership position in the nation relative to mobile capability.

So we see opportunities there to add into that. I think the one that Julie talked about and really to us is a great access because again economics are going to play into how well we can discriminate the types of treatment through diagnostics, and the diagnostic arm as supplied urology along with some of the technology advancements in diagnostics in terms of molecular diagnostics that will enhance sustaining capabilities in the pathology area are really in the forefront, so when we talk about HealthTronics, both their position, what we can add into it, what we can put organic growth around it, as well as accent it with our sales team to Julie's comment with the cross training, it does give us I think a great amount of latitude for both organic growth and expansion off their model. Anything you want to add, Julie?

Well, I will just remind you that we just closed on HealthTronics, so we'll be prepared to provide some more granular detail on our third quarter earnings call, but the second part of the question was with respect to the warning letter that FDA sent to HealthTronics, and this as a reminder was in regard to their Endo care unit and some specific probes that they manufacture and sell contingent to the Endo Care device.

I would just like to first of all start by saying that the letter had no direct impact or disruption in sales of the Endo Care business, and important to note that on July -- I am sorry, on June 15, HealthtTronics announced that Endo Care received 5-10-K clearance from the Food and Drug Administration for their cryo care CS surgical system including a number of variable cryo probes including the V Probe. The reason I bring this up is that the warning letter, one of the big issues raised in the warning letter, was with regard to 5-10-K clearance of this probe, so literally within two weeks of receiving the letter the FDA cleared the probe and the substantive matter of the warning letter was addressed. There were other concerns raised and we are working actively with our partners at HealthTronics to implement a quality systems program that will address all of the issues raised in the FDA warning letter and we're very confident that we won't experience another event like this in the future.

Thanks.

Thanks, Irena. I think we have time for two more questions.

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

Thanks very much for taking the question. Julie, can you elaborate a little bit on the magnitude of the salesforce reduction in the second half of this year and maybe give us some broad ranges of what the net savings are expected to be there and then maybe Alan, could you provide a little bit more color on the $4 million SG&A adjustment in the quarter and what exactly that adjustment includes?

Hello, Ian. This is Julie. Thank you for your question. I am not in a position to comment on the specifics of the salesforce reduction. I will be able to do that when we get past internal communications, but at the moment we are working through setting up the alignments and identifying what the overall impact will be to the organization, so at this point I don't have more specifics to offer than that.

I could say, Ian, as Julie had indicated at the top of our call, net-net we think about the field force adjustment as part of creating more flexibility in our promotional strategies, and increasingly we think about our promotional strategies through an integrated set of trade offs among contracting discounts, field force promotion, and advertising and promotional investments. And so while we are adjusting and moving field force into contract organizations and creating more of flexibility in terms of a variable cost structure, the net savings are expected to be fairly modest. It is really around enhancing the effectiveness of our promotional strategies. With regard to the $4 million on the SG&A side, that relates to some of the costs associated with that restructuring effort which have been accrued in advance of our actual execution in that regard.

Okay. While I have you, Alan, are there any change of control provisions in any of the HealthTronics partnership agreements?

No, not anything that would be significant in any way. We did as part of that transaction ensure that we kept the senior management team from HealthTronics. We were very impressed with the work that they did to develop the business, and as well the early feedback that we have gotten through discussions with our colleagues at HealthTronics with regard to partnership reactions to Endo's acquisition has been very positive.

Thank you very much.

Okay thanks Ian. Can we go to the last question, please.

Your final question is from the line of John Newman of Oppenheimer. Please proceed.

Hi, guys, thanks for taking the question. Just wondering if you could give us some thoughts on Fortesta in terms of the market opportunity. I know that over time there has been a lot of focus on AVEED, you know but I think you mentioned earlier in the call that you see the topical testosterone market as substantial and also just wondered if you could give us a little bit of color as to what the analysis is that you did this time? It seems like it was a little different than last time. Thanks. Bye.

Hi. Thank you for your question. As I mentioned earlier, the testosterone replacement therapy market is a market that currently exceeds $1 billion in sales, and has been growing at a compounded annual growth rate of 20% in the past four years.

I think what that demonstrates is that there is clear unmet medical need for men suffering from low testosterone and that this market will continue to grow with the aging demographics that Dave has referenced in his comments. The topical gel segment is 70% of the market, and in terms of prescriptions and over 90% in terms of dollar sales, so we're very excited about having what we believe is the best in class product launching into a very significant and high growth market.

Thanks, John, and this is Ivan regarding the second part of your question on the analysis. You may recall as we said previously that we were pretty confident in the products, that it does work and that it is well tolerated, but there were some issues FDA had talked about at the lab the way the analyses were undertaken at the lab. What we in fact did was we were fortunate, the vast majority of samples had been saved so we in fact reran all the analysis, and that was the basis for our complete response.

We had a very productive discussion with FDA in the second quarter. They were pretty much on the same page as we were regarding that reanalysis, so it wasn't different -- it is just we repeated it all and we showed essentially we believe that the first analysis was correct because we repeated mostly it all over again and that sort of showed it was highly concordant.

Okay. Great. Thank you.

Ladies and gentlemen, that concludes our question and answer session for today's call. I would now like to turn the call over to Dave Holveck for closing remarks.

Well, I want to thank everybody who attended the call and certainly the management team here for hopefully being able to give you a more clear and concise update as well as insight as to where Endo is going. Endo clearly sees long-term opportunities for growth. I think we also are very clearly aware of the dynamics of the environment. I think going forward as we mentioned numerous times in this call, it is about health economics. It is about greater access, and it is about much better and more reliable and viable outcomes.

I think all of that has to be something that gets integrated and executed by companies like ourselves, industry at large, and it is going to change business models relative to both the payer as well as the provider. We think we're positioning ourselves for that transition. In many cases we think that what we have developed so far is an array of products that allow us to really be a dominant player in some of the care pathways that we think are going to play up against age demographics as well as areas that are significant in quality of life, so I hope some of this starts to come together and you see both what we're doing and how it translates into the economics of healthcare but also the growth of our business, and on that I again appreciate your following and look for your continued support.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.