Endo International PLC (ENDP) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Endo Pharmaceuticals earnings conference call. My name is Shakwana and I will be your Coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Blaine Davis, Vice President Corporate Affairs. Please proceed, sir.

Good morning, everyone, and thanks for joining us. With me on today's call are Dave Holveck, President and CEO of Endo, Julie McHugh, Chief Operating Officer, Dr. Ivan Gergel, Executive Vice President of R&D, Alan Levin, Executive Vice President and Chief Financial Officer, along with Caroline Manogue, Executive Vice President and Chief Legal 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 the 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 earlier this morning. With that, I'll now turn the call over to Dave.

Thank you, Blaine. And if I don't mind saying, Endo had a terrific fourth quarter and a record year for 2010 with strong performance across every segment of our business. We had revenue of $511 million and adjusted earnings per share of $1.06 per quarter. And revenues of $1.72 billion and adjusted earnings per share of $3.48 per share for the full year. All of these results exceeded our guidance. Given that outstanding performance, we're raising our financial guidance for 2011. We now expect to generate revenues of between $2.35 billion and $2.45 billion, adjusted diluted earnings per share of $4.20 to $4.30 and a GAAP earnings per share of $2.43 to $2.53. Clearly, our core business is strong and continuing to grow.

We also have new businesses and new products to drive our growth. For-- with FORTESTA Gel , which is indicated for the treatment of low testosterone in men, we have an exciting opportunity to launch a new drug. We believe there is significant undertreatment of low testosterone. Favorable age demographics along with increasing physician and patient awareness are growing testosterone replacement therapy, or TRT sales, at more than 20% annually. With the support of our commercial team, we believe we are in an excellent position to enter this important and underserved market. Our sales force aligns very well for this opportunity. We have our urology and endocrinology sales force to target key opinion leaders for testosterone replacement therapy. And we have our pain solutions sales force to target the primary care physician community that writes the majority of TRT prescriptions.

Looking ahead, we believe our key success will be our focus on sustainable long-term growth. With the recent acquisitions of HealthTronics, Penwest and Qualitest now completed, Endo has become a well-diversified healthcare Company. We sell more than 175 products in the field of oncology, urology and pain management. We are the sixth largest Generic pharmaceutical Company in the United States, by prescription volume. And we have a device and service partnerships with approximately one-third of urologists in the United States. Pain products remain a core part of our business, but they will represent a smaller percentage of our revenues and earnings as we continue to grow in other areas. I think that's healthy and reflects the success of our strategy as we track towards another record year.

We believe our strategy and--while finding and filling gaps in patient care, beginning multiple treatment platforms together with building our business in pain, urology, endocrinology, oncology and Generics has served us well. As we become a larger and a more diversified enterprise, this strategy will continue to be our guidepost for future growth and success. We have great momentum and a very talented team carrying us forward in 2011. And now, I'd like to turn the call over to Julie to describe in more detail what's driving our performance and lies ahead for our business.

Thanks, Dave. I'd like to start this morning by thanking all Endo employees and in particular our commercial team for their focus on execution in 2010. Our commercial model, which is focused on formulary access, created the opportunity for our sales forces to succeed last year and has positioned us well for 2011. This morning I'm excited to announce the formal launch of FORTESTA Gel. Last week Endo held it's annual sales meeting. One of the primary objectives of that meeting was to complete training for the sales representatives who will support the launch of FORTESTA Gel. We've studied this market carefully, evaluated how best to reach prescribers and believe that we can support the launch effectively with approximately 500 of our sales representatives. 100 of that total are from our urology and endocrinology focused sales forces, and they will target key opinion leaders in testosterone replacement therapy. The remainder of that total will be representatives from our pain solutions sales force who will target primary care physicians. Over 60% of testosterone replacement therapy prescriptions are written by primary care physicians today and so we are in position with our commercial team to address that audience as well.

We believe that FORTESTA Gel for the replacement of testosterone in men who suffer from hypogonadism is a product that differentiates well versus currently available therapies. FORTESTA Gel is clear, odorless, applied to the inner thigh and is dispensed from a metered dosed canister. Our market research indicates that FORTESTA Gel's characteristics will be viewed favorably by potential patients versus the current market leading gels. In the addition we have met with payers and their initial feedback regarding our competitive pricing of FORTESTA Gel has us excited about our ability to create access and demand starting today. We have a proven track record of being able to create access for our products through managed care contracting. The growth in prescription volume for products such as Voltaren Gel and OPANA ER are solid examples of our capabilities.

During the fourth quarter, we closed the acquisition of Qualitest. We're now 3 months into the integration and very pleased with the progress in bringing the 2 Companies together. However, what is even more encouraging are the positive growth trends in revenues, the potential for even better synergies than we originally envisioned. We currently expect stronger revenues from the combined Endo Generics business in 2011 versus the $500 million announced at the time of the acquisition.

Growth in our Generics business will largely be supported by product launches over the next few years. We currently have 46 ANDA reviews ongoing at FDA and we're reviewing the development programs from the combined Company in order to select the best opportunities for development going forward. In 2011, we expect 14 ANDA launches, which we believe will contribute approximately a quarter of the growth expected for our combined Generics business. It's a diversified portfolio as well, with oral contraceptives, pain therapeutics, anti-inflammatory agents and other medications.

OPANA ER had an exceptionally strong result in the fourth quarter, and finished 2010 with prescription growth of 35% for the full year. A portion of the growth in the fourth quarter may have been owed to marketplace disruption resulting from the introduction of the new formulation of OxyContin. However, what is important to Endo, is that our managed care team created patient access through contracting and our commercial team equipped our targeted sales force with the necessary tools to succeed in capturing this opportunity.

I'm looking forward to the year ahead and excited by the opportunity to drive the operational performance for a substantially diversified Company in 2011. Creating additional value for our acquisition of Qualitest is a primary focus, but we'll also continue to evaluate organic and strategic investment opportunities across devices and services, Branded and Generic pharmaceuticals. Now, I'll turn the call over to Alan for his review of the financials. Alan?

Thank you, Julie. Endo had a strong fourth quarter and full year for 2010. Some of that operational strength, along with greater opportunities from our Generics business, drives the increase in our financial guidance for 2011. I'll start today with a review of key changes to our guidance as well as key assumptions that remain unchanged. We now expect total revenues of between $2.35 billion and $2.45 billion, or more than 35% growth versus 2010 revenues, an increase from previous guidance of $2.2 billion to $2.3 billion. We now estimate adjusted diluted earnings per share in a range of $4.20 to $4.30, versus previous guidance of $4.15 to $4.25. And reported or GAAP diluted earnings per share are now expected to be within a range of $2.43 to $2.53. The increase to the revenue range is driven by strong operational trends within our Generics business and our OPANA franchise. For 2011, we will not be providing segment specific revenue guidance, but as Julie mentioned earlier, we do expect significantly higher revenues from our Generics business than the $500 million estimated at the time of the Qualitest acquisition.

Regarding the ranges, we believe that our expected revenue and earnings per share ranges are wide enough to consider the effects of our product launches as well as potential for Generic competition on certain products within our Branded pharmaceuticals business. On an adjusted basis, we expect our corporate gross margin as a percentage of revenues to be approximately 70% in 2011. With a full year impact of last year's acquisitions, we expect adjusted SG&A to now grow by approximately 20% versus full-year 2010. However, as a percentage of revenues, SG&A will decline by a few percentage points.

Similarly, the addition of Qualitest is the primary driver for an anticipated increase in total R&D expense of approximately 25% on an adjusted basis. However, as a percentage of revenues, we believe R&D expenditures will decrease modestly. We anticipate an adjusted effective tax rate of approximately 30% after taking into account the non-controlling interest expense from our device business, and cash tax savings from net operating losses as well as other tax attributes from our completed acquisition of Qualitest Pharmaceuticals. We also believe that our fourth quarter 2010's diluted weighted average shares outstanding or approximately 121 million shares, would be a reasonable share count assumption for use in 2011. I look forward to updating you on our progress towards achieving these objectives and I'll turn now to the review of our latest results.

For the fourth quarter of 2010, we had total revenue of $511 million, up 31% over the fourth quarter of 2009. For the 12 months ended December 31, 2010, we had total revenue of $1.716 billion, up 17% over the same period of 2009. Lidoderm as guided completed full year 2010 with net sales growing by 2%. On an adjusted basis, gross margin was down, consistent with our expectations, by a 5.8% to 73.7% of revenue versus 79.5% during the fourth quarter of 2009. The decline is driven by a combination of the addition of HealthTronics and Qualitest in 2010 with their relatively lower gross margins, offset in part by the removal of the royalty on sales of OPANA ER that had been paid out prior to our acquisition of Penwest.

Total reported operating expenses for the quarter were $192 million. However on an adjusted basis, total operating expenses for the quarter were $177 million. This total comprises selling, general and administrative expenses of $143 million and R&D expense of $35 million. Together these items declined slightly versus prior year adjusted total operating expenses of $178 million. Fourth quarter adjusted net income was $128 million, up 34% over $95 million during the fourth quarter of 2009. Our reported diluted earnings per share decreased to $0.77 versus $1.25 in the fourth quarter of 2009. On an adjusted basis, adjusted diluted EPS increased 31% to $1.06 versus $0.81 in the fourth quarter of 2009. Our adjusted effective tax rate for the fourth quarter of 2010 was 28.7%, and benefited in period versus prior guidance from the full-year impact of the renewal of the R&D tax credit. Fourth quarter reported or GAAP earnings reflect a $32 million net pre-tax credit related to purchase accounting considerations associated with the octreotide implant, which we have been studying for the treatment of acromegaly in carcinoid syndrome.

Under purchase accounting rules, we are required to capitalize the value of pipeline compounds acquired in an acquisition and to test the values of these assets for impairment under certain conditions. In February, we received the minutes from our pre-NDA meeting with the FDA with respect to our development program for the treatment of acromegaly. The FDA concluded that additional pre-clinical studies including a carcinogenicity study would be required. While the Company remains committed to this program for acromegaly and is encouraged by recent preliminary results from its Phase 3 study, we recorded a nearly $54 million credit reflecting a reduction in the liabilities on our balance sheet associated with the contingent consideration due to former Indevus and Valera shareholders in the event that the product is approved by the FDA within certain time frames. This credit reflects the decreased probability of having to make these payments during the specified contractual time frames. Offsetting this credit is a non-cash impairment charge in accordance with GAAP of $22 million, related to the impairments of the octreotide implant program for the treatment of carcinoid syndrome. The Company recently assessed all of its in-process research and development assets and concluded separately to discontinue development of its octreotide implant for the treatment of carcinoid syndrome.

Overall, we had a strong fourth quarter and full year 2010. For additional details of our financial results, please review today's earnings press release. I'll close by noting that our Company generated over $450 million of cash flow from operations in 2010. We substantially diversified Endo through business development activities, we've created three businesses in which to invest for sustainable growth. In 2011, we look forward to continuing to evaluate appropriate uses of that cash flow including reinvestment in organic growth, additional business development activity and the optimization of the Company's capital structure. This concludes my prepared remarks. Now I'll turn the call over to Blaine.

Thanks very much, Alan. This concludes our prepared remarks summarizing the quarter. I'd like to now turn the call back to the Operator so we can begin the Q&A session.

Yes, sir. (Operator Instructions)And your first question comes from the line of John Boris representing Citi. Please proceed.

Yes, thanks for taking the questions. First question, just for you, Dave, as you think about uses of cash going forward and in particular for trying to identify assets for organic growth, can you just help us out how you're thinking about that going forward? And then one for Alan on the $150 million raise on the revenue side, you did indicate there was a mix of Qualitest and OPANA ER, can you just maybe help parse out how much of that might be coming from Qualitest, how much might be coming from OPANA ER? Thanks.

Yes, good, I think you're right on relative to the emphasis that we look at in terms of organic growth. I think the build out of our strategic plan with the acquisition of Qualitest, HealthTronics, the HealthTronics both from a device and service, from a lab perspective, obviously the generics gives us manufacturing platforms, I think those elements are really the basis under which we think we can add organic growth relative to both the service as well as further accentuation of our generics business. I think we also see as a result of HealthTronics, opportunities on the devices. And again, they have albeit some limited capability on the manufacturing there, it still gives us a foothold in that area. I think those are areas that will allow us to have earlier forms of organic growth, buttressed by some of which you'll hear further from Ivan on some of the later stage projects that are in the R&D. But we really do see 2010 being a formative year for ourselves in terms of expanding the capabilities and structure of the enterprise that will give us a greater reach of organic growth and even in some cases sooner than maybe originally forecasted.

And just to your -- one further point on Dave's comment as regards cash and how we see the use of our cash on hand, this is a Company that generated $450 million in cash flow from operations last year, it will generate substantially more than that this year. We'll continue to put the cash to work in organic growth opportunities, business development, as Dave has outlined, and capital structure optimization.

On your question about revenues, I think that the $150 million is really a function of a balance of performance in both our branded pharmaceuticals as well as our generic sector. We're now three months into the acquisition and integration of Qualitest and we are very pleased with what we are seeing. We think we're off to a very good start there and so we certainly see upside and although we haven't quantified it specifically, I would tell you that a meaningful piece of the $150 million does come from the generic side. By the same token, in the branded segment, we continue to be very pleased with the performance of OPANA ER. It's a product that has responded very well to our formulary positioning and to our promotional strategies with targeted physicians. We continue to expect to see good growth in that franchise this year. And as Julie pointed out, we're off to a very strong start early in the year on FORTESTA and so we see some upside there as well. So I think it's really a balanced contribution coming from both the branded pharmaceuticals as well as the generic side.

Hi, John, it's Ivan Gergel here. And just to add to some Dave and Alan's comments, I think from an organic growth standpoint we really do have a very diverse program now, across the board essentially, as Dave said building on HealthTronics in the device sector. We're looking at new ways to bring cryosurgery forward. We have our implant which obviously came in from Indevus. We had a broad array of generics coming through the R&D pipeline. Obviously we have our current late stage branded pipeline with Urocidin, with pagoclone, Axomadol and ocreotide. And then for the long term, we have a rapidly growing discovery pipeline. We have now 13 products in the discovery pipeline, the first of those which came in with our partnership with Orion is actually due to go into the clinic for prostate cancer in the first quarter.

And I just might add that one final organic growth driver that I'd like to highlight is our Lab Solutions business that we acquired through the acquisition with HealthTronics. This particular business gives us a nice starting platform for a diagnostics business going forward and we're looking forward to accelerating the growth of that organic growth driver in 2011.

Yes, I hope that covers again the comment, we're really pretty proud of where we've come in the last three years in terms of the building out both the diversification of the Company platform wise, capability, but also the pipeline, which when we started this transition three years ago was pretty thin.

Thanks for that. Just one follow up for Julie, if I may.

Sure.

Just on Qualitest, you care to call out any of the 14 ANDAs that you mentioned generically that are pretty important for moving the franchise and then what's your pricing assumption for the generics business?

So I don't have product specific guidance that I can provide with respect to the ANDAs. I think you can -- that they span the therapeutic areas that we're currently in, pretty much across the board. And with respect to pricing, as with any generic product launch, we're obviously going to have to be price competitive and we factor that into our sales projections and our assumptions around what percentage of the market we'll be able to capture based on our product offering and our price.

Okay. Thanks for that.

Thanks, John.

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

Hi. Congratulations on a good quarter and thanks for taking my call. Just a quick question on the launch of FORTESTA. Just want to know how you might handle the launch with -- in light of the promotion that's occurring with Lilly. I know you're going to benefit from increased education in the marketplace but how do you plan on getting that share of voice in light of their product launching as well?

Good morning, Annabel, thanks for the question. Yes, well, first and foremost, we have as I mentioned nearly 500 sales representatives who will be promoting this FORTESTA Gel starting today. We are -- we have a very wide coverage with our urology and endocrinology sales force across all of the major prescribers for testosterone replacement therapy. In addition, we have about 385 of our pain solution sales reps who will be promoting FORTESTA Gel to primary care physicians who write the lion's share of these types of products. So we feel from a personal promotional point of view we're very well positioned to capitalize on this high-growth market.

And just to provide a little commentary on the market and why we're so excited about FORTESTA Gel, this is a $1.2 billion market that's growing at a compounded annual growth rate of about 20%. And at this point, only about 9% of men who are potential candidates for testosterone replacement therapy are actually getting treated. So we see this as a significant market, a high-growth market and a market that can be a high-growth market for years to come. We believe that we're very favorably positioned with our product offering. We believe we have a very elegant product and our market research would indicate that patients and providers both are very excited about having this new addition to offer their patients. It provides a clear, odorless and very discrete application, surface area that we believe will position the product very well to capture market share at the expense of the current competitors.

I should also note that you mentioned Lilly specifically, and we at this point believe that we're well ahead of them in terms of our position to market. So we look forward to being a key player in this particular market and believe that we're very well positioned for success.

Okay. Great. And if I can ask a follow up on Qualitest. The -- you mentioned that obviously the upside to the guidance was primarily related to what seems to be significantly more revenues than the $500 million. Can you quantify what significantly more means and are there any operating synergies that you've also identified? And what specifically in those revenues -- is there something specifically in those revenues that you hadn't seen before?

Yes, so just to clarify. The increase in our revenue guidance, it's really a function of a balance between the generics from Qualitest, coupled with stronger performance on OPANA and the early launch of FORTESTA. I think those are the three primary factors. I think we haven't been specific about the upside on that but the 15% revenue CAGR that we talked about when we announced the deal is now in my view a floor for the growth trajectory over the next two years. So we are very pleased with the in-line business. We're not overly dependent on any single new product launch to reach our trajectory. And the business model for Qualitest itself, which is really to grow volume of in-line business over time, remains very robust and very much intact.

And with regard to synergies, Annabel, I think we communicated previously that we would expect to realize about $30 million in expense synergies by year three, and I can tell you that we have already identified substantially all of that and we'll begin implementing and having some of those impacts in this calendar year.

Okay. Great. Thank you.

Thanks, Annabel.

Your next question comes from the line of Gregg Gilbert representing Bank of America. Please proceed.

Thanks. Good morning. First on FORTESTA, Alan, how can you already have upside on that item in your guidance at this point? And Julie, can you talk about the pricing strategy in more detail, quantify where access is today and maybe what your access goals are for the rest of the year on FORTESTA?

Good morning, Gregg. So two comments on FORTESTA. One is with respect to timing assumptions for launch and how quickly we'll be in the field promoting it, we had a range of assumptions that we looked at when we provided our original guidance in November and that has now clarified itself. Secondly, at the time we provided our guidance in November, FORTESTA had not yet been approved by the FDA, and so we typically haircut our internal revenue projections for the probability of approval. With that now resolved, that results in some upside within the totality of what we're looking at.

Got it.

And Gregg, to answer your question on FORTESTA Gel pricing, as I said, we priced FORTESTA to be very competitive with the market leading products and in fact have offered a discount to the market leader in terms of our WAC price. In addition, we've been in negotiations and discussions with managed care for the past several weeks and we'll obviously be -- in addition to offering a price discount, we'll be offering contractual terms to get us favorable access and our goal is to have a substantial portion of covered lives on either tier 2 or tier 3 by the end of 2011.

Okay. Great. And then OPANA ER, can I assume that your assumptions include some of those strengths going generic this summer and do you think there's an upside opportunity that the FDA could in some way undue the final approval that Actavis has?

We do anticipate that the smaller dosage form strengths that for which Actavis was first to file that those dosage forms will go generic this summer. We have not explicitly incorporated any upside into the range that we provided in that regard and we'll continue to monitor that situation very carefully. But at this point, 90% of the revenues in OPANA ER are from the stronger strengths. We've seen some favorable mix movement to the higher strengths over the course of the fourth quarter, so we remain pretty confident in our OPANA ER projections.

Great and lastly for Dave and anyone else who wants to weigh in, obviously Qualitest is going well so far, Julie, you've described the integration as going well. So how open are you to additional M&A in this area, sooner rather than later? Thanks.

I'm not going to put a timing on it but certainly opened, yes. I think with the platform and the manufacturing, with the continued stress on the healthcare system economically and the importance of generics, which is one of the reasons why we bought it in order to give us that diversification, we're anxious to be able to expand out on this platform. I think we have good people down there. We have the space, if you would, the land, and with the leadership position we have in pain and they're number one leader in the liquid, again that gives us a strong base that we can expand out on. So we're certainly targeting, and it's got a little bit more than just being opportunistic, but it is a growth opportunity for us and we look forward to exploit it.

I'd say the other thing that I would add on that is as we've established our critical mass in these different business segments, we're also looking at ways to connect the segments together for greater opportunity for Endo overall. In the pain space, some 40% of Qualitest's business was in controlled substances for pain. And so given that the majority of pain medications are now generic in the US, we actually commercialized three out of four of the pain medications available in the US. That presents some meaningful opportunities for us. There may be a couple of gaps in that portfolio that we'd want to fill in and those would be logical candidates for business development activity.

And finally, I'll just note that with our generics business we are not dependent on acquisitions for growth. We have a very strong growth platform in our generics business, founded on a very robust R&D portfolio.

Thanks a lot.

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

Thanks very much. First question is could you elaborate a little bit more on the scope of the response required for your tamper resistant OPANA to the FDA? Any update on timing and just whether or not you'd anticipate it would be a class 1 or class 2 turnaround once you submit that response?

Yes, regarding the scope, we met -- actually we met with FDA in February. It's reasonably straightforward, it doesn't change our timings, we think it's mid-2011. We think it's a type 2. We think they'll take 6 months, there'll be a 6 month clock against it. So after we've refiled -- or filed a complete response, Corey, we should hear within 6 months.

And would you characterize the questions that they asked as something that's just routine or something that's maybe a little bit more questionable as to what their final answer will be?

No, my read on that I would say is more on the routine side. I think the answer is we can provide an answer to them that's reasonably straightforward and we have reasonable confidence that it should go smoothly.

Okay. And on the competitive front, just maybe if you can offer some thoughts as to what you think the impact of Purdue's launch of their transdermal patch is, the effect on your pain franchise, is it mostly cannibalizing more the Duragesic or are you seeing some sort of effect on Lidoderm and/or OPANA there?

Well, we're obviously following the Butrans launch carefully. We believe that it will compete in on -- among the more weaker opioid-based therapies and won't have a direct impact on either OPANA ER or some of our generic competitors that are category 2 opioids. So we're going to follow it very carefully, but I believe that we'll -- our core franchise, OPANA ER in particular, will continue to be very strong and will not be materially affected by this launch.

Okay, thanks, everyone.

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

Thanks. Just a couple on coming back to FORTESTA, can you talk about positioning of the product versus AndroGel and Testim, and I guess at least within the uro or an Endo setting, is -- do you think your ability to drive uptake among the specialists is dependent to a large extent on getting patients to switch from the older gels?

Thank you for your question, David. The way that we're positioning FORTESTA in the market is obviously as I mentioned before, from a pricing point of view and a contracting point of view, our first order of business is to ensure that physicians who want to write this product and patients who want to use this product have access to it. So that's our initial focus. And we think with our pricing strategy and our contracting strategy, we'll be able to achieve that successfully.

With respect to how the product will compete, the product features -- this is a commodified class in large part and we really believe that the product features and the ease of use of FORTESTA Gel will set it apart from the competition. Just to reiterate, FORTESTA Gel is a clear product, it's odorless, it only requires a few drops of therapy that's applied to the inner thigh and it comes in a metered pump that precisely dispenses the product. So we think that these product features are going to be very -- viewed very favorably by patients and physicians and we're not dependent on product switches per se. We believe that there's a lot of growth in the marketplace that will benefit both from the market growth as well as having a differentiated and easier to use product than the current products on the market.

And I think as Julie has mentioned earlier on the growth in the marketplace, it is a market that's more than $1.2 billion in sales in the US. It's growing at more than a 20% CAGR, so there's a lot of opportunity there. And I think the key to success in any new product launch is also effective contracting and we've got a good track record of doing that with products like OPANA ER and Voltaren Gel and we'll look to do the same with FORTESTA to create access as a key objective this year.

Okay and then 1 follow up on FORTESTA, if I may. Can you shed any light on how you're thinking about peak penetration in terms of overall volumes for topicals and I know what the growth rate of the market has been over the last several years it's a consistent double-digit grower, but do you expect that to continue and is that mainly a function of growth in the primary care setting? Thanks.

So I'm not prepared to comment on peak year sales forecast for FORTESTA Gel. But again, we do anticipate that this market will continue to grow. It's been growing for the past five years at a compounded annual growth rate of 20%. We don't see anything that would stand in the way of that market continuing to grow in that range over the course of the next several years. Again, we believe we are highly competitively positioned to take market share from market leaders and to build market share through the acquisition of new patients. So I think this is going to be a really nice growth -- organic growth driver for Endo in the years to come.

Okay, thanks.

And your next question comes from the line of Shibani Malhotra representing RBC Capital. Please proceed.

Hi, guys. Thanks for taking the question. Just a few. So first on Lidoderm, if I look at prescription trends and what you reported this quarter, it seems that you were taking -- or it seems like there was a price increase, is that correct? And then how should we be thinking about pricing on this product going forward?

The second question I guess, Dave and Julie and Alan, for all of you, Watson's clearly putting generic Lidoderm into their guidance for 2013, just wanted to get your thoughts on how you see your IP and how you see the situation playing out, particularly given that Milan has also filed a Paragraph IV for the product? And then finally, can you just update us on what is happening with AVEED,should we assume the product is no longer being developed or is there still something to do over here? Thank you.

Let me jump in first. No, AVEED is not on the sidelines, it's very active. And we believe it has a great opportunity in this marketplace relative to a long-acting and again to the specialists that we call on with our endocrinology force. So I could take that off the table pretty quickly. And, Ivan, I think you might want to chime in on where you're at with that.

Yes, just to echo Dave's comments, very much, it's right up in front. We've actually requested another meeting with FDA. We hope to hear back from them soon. We've had a lot of opportunity now to consider our prior discussions with them and we're trying to work through a pathway forward. But we're very much committed to this, we think it is -- be part of a franchise in the low T area and we think it's got considerable advantages over current available testosterone replacement therapies.

And with respect to your first question, which was Lidoderm pricing, we did in fact take a 5% price increase in the first quarter. This was largely offset by increased discounts to managed care as well as the mandated discounts to Medicaid as a result of healthcare reform. I will just say going forward, we believe that Lidoderm will continue to perform in the low single-digit growth area. We think that there are some potential growth drivers that might give us some upside to that but -- and that that's largely tied to the aging demographics and economic improvement that may in fact increase the use of add-on therapy for PHN. So Lidoderm continues to be a very significant and important revenue contributor to Endo, and we're continuing to invest behind the business. We believe we have a nice road ahead here with this product. And to answer your specific questions around litigation and IP, I'll turn it over to Caroline Manogue.

Thanks. And thanks, Shibani, for your question. We do continue to believe our patents are strong and the Watson litigation is ongoing as you know. On the Milan front, we are in the middle of our 45-day period at this point in evaluating their P IV notice as well as the ANDA itself, so it really is premature for me to comment on the Milan situation right now. But of course, Watson does remain first to file and essentially a barrier to that application. But of course we do continue to believe that the regulatory pathway to FDA approval of a bioequivalent generic to Lidoderm is very unclear. A topical product such as Lidoderm it's difficult to achieve in our mind bioequivalents and we continue to participate in the debate and the scientific dialogue about this important issue. So we do believe it is difficult to bring a generic to market.

Yes, I would say Shibani, it's Alan, just to Caroline's point, if you look at the combination of the litigation strategy coupled with the regulatory pathway and on top of that some manufacturing investments, collectively it's a fairly significant hurdle to any genericization in the Lidoderm franchise, and we'll continue to pursue all of these avenues vigorously. I can't comment on Watson's specifics in its guidance other than to say that a number of stars would need to align perfectly for that outcome.

Okay, can I just have a quick follow up on Lidoderm? I know in the past you've said that you're not necessarily considering a follow-on product for this, have you updated your view on that? Is it possible, given that we're getting close to 2015, that we may just see something that's a second generation Lidoderm?

Well, we continue to explore opportunities in the R&D space for product line extensions but have not identified anything that we think is meaningful at this point in time. I will say that just to Julie's point earlier, we remain very confident in our Lidoderm projections. We consistently guided to low single-digit growth in 2010 and delivered that, notwithstanding the impact of healthcare reform once it was enacted. As we look out to 2011, we see decent script trends for the product. We have seem formulary positioning for the product that has remained essentially intact throughout the year in 2010 and it remains in place for 2011. So we're very comfortable and pleased with our formulary positioning. We did announce a 5%, or 5.5% price increase on Lidoderm in the February first time frame for this year, although on a net basis after rebates to managed care, that's a low single-digit contribution. So net/net, we're in pretty good shape we feel with respect to Lidoderm.

Sure, one other thing, Shibani, back to AVEED, I think we've mentioned this before but the runway for AVEED is very extensive. We've got IP protection out through 2027. We now know from our partner that there's over -- close to 2 million injections of AVEED being given on a global basis. So we remain optimistic on this product and we believe we can work with FDA to bring this through at some point.

Great. Thank you.

And your next question comes from the line of Rich Silver representing Barclays Capital. Please proceed.

Just a couple questions. First on Qualitest, can you talk about some of the qualitative factors that has led to let's say greater optimism in terms of the numbers for 2011? And then secondly, on FORTESTA, relative to when you first brought this product into the pipeline which at that time was seen perhaps as a product that would complement AVEED, has your expectations, even though you're not quantifying peak sales, have your expectations based on maybe additional market research changed relative to maybe even a year ago?

Yes, well, let me -- and Julie can give you a little bit more detail. On the Qualitest qualitative elements that I guess underpin our enthusiasm about both the company and what it can deliver, I think what we've been able to see and enhance is just the process elements and what I'll call limited capital expenditure, which can enhance the-- some of the packaging, the filling lines. I think the elements of their infrastructure are very strong. But at the same point, some of the elements that we feel improve process and some expansions gives us greater opportunity to deliver higher capacity in a more rapid time. And therefore, we can seize opportunities that come up in the generics -- in the market in a more timely way. So qualitatively, strong company with just a few tweaks here and there, I think we can bring it to a whole new level. Julie?

So maybe just a few more things that we've seen since completing the deal. Again, as Dave mentioned, this manufacturing capability that we've acquired has given us the opportunity now to in-source products in our branded and generic legacy Endo portfolio into our own system, which will yield significant manufacturing efficiencies and reduce costs. We're also seeing the opportunity to potentially in-license -- I mean in-source, rather, all of our distribution activities into the Huntsville based distribution center, again, yielding additional synergies for the combined businesses both on the branded and generic side.

And then finally, our R&D capabilities are highly complementary. The two organizations, when we've looked at the combined R&D portfolio, there were only two overlapping projects in the 80 that were being evaluated at various different stages of concept development and product development. So all of that has netted out to being a confirmation of our investment hypothesis, which was that this business was going to be highly complementary. All of that has played out, and in certain cases, exceeded our expectations as I've outlined.

That's all really helpful. Can you maybe just to better understand all the things that you've listed what relate more specifically to the top line and the greater higher expectations for the top line contribution for Qualitest, particularly in this coming year?

Well, again, Rich, I think it's in part a function of just the broad-based nature of the portfolio itself. So to give you a couple of examples, in November, Propoxyphene was withdrawn from the market. We've seen sales of Propoxyphene migrate into a number of other products that we commercialize. It's a benefit of commercializing three other pain medications in the US. So there's tremendous resiliency even when you see changes in the marketplace.

The FDA recently resolved its Ad Com discussions on APAP combination products. That plays very nicely into the way we've positioned ourselves with low dosage form strengths of acetaminophen for Percocet and Endocet. So -- and then we've seen a couple of instances in both 2009 and 2010 where in the opioid market we've seen competitors supply disruptions that we've been able to meaningfully capitalize on and retain market share. So when you look across all of that, we tend to find that it's a very resilient business. We are well positioned in it. We have very attractive competitive positioning and the activities over the last three or four months have just given us increased confidence that we'll continue to be able to execute very well.

The second part of your question had to do with FORTESTA and what we've learned over the past year from market research, and what I can tell you is that the market has continued to evolve and grow, as I mentioned earlier. And what we're finding now, and what we discovered in our market research, is that the product features, specifically as they pertain to application and potential risk for transference, are key drivers of product preference in the market, and FORTESTA is extremely well-positioned to capitalize on those unmet market needs. So we feel that, again, FORTESTA's going to be a very strong contributor in the future and we're excited about getting underway with the launch today.

Thanks very much.

And your next question comes from the line of Marc Goodman representing UBS. Please proceed.

Yes, hi. First, can you talk about the gross margin in this quarter, it seemed like it was a little lighter than we thought, if you could just explain that?And then second, on HealthTronics, can you give us a flavor for how to think about quarterly progression in this business or should we just assume that all the quarters are roughly the same? Thanks.

Sure. Good morning, Marc. With regard to gross margin in the quarter, there are a couple of things that are in place. So it's a busy quarter from that perspective. You have down drivers in gross margin that come from the shift in mix, not only from HealthTronics but the addition of Qualitest with an early close this quarter and that puts some downward pressure on gross margins. Offsetting that, you've got the elimination of the royalty that we would otherwise have had to pay on OPANA ER sales to Penwest, and that was a 22% royalty rate. And so that's eliminated and so that's part of the neutralization. So net/net, there are a lot of moving parts that come together and I think the early close on the Qualitest transaction probably accounts for the down draft you're referring to. As we look at 2011, we think the totality of this plays out to roughly a 70% gross margin for the year for us. You'll see the full year effects of HealthTronics and Qualitest certainly in those numbers but there will also be a partial offset from the elimination of the OPANA ER royalty stream.

With regard to HealthTronics, there's really not much by way of seasonality or cyclicality from one quarter to another. I think that we will continue to see fairly stable revenue trends in their base business on lithotripsy and we do see some growth opportunities in the lab business as we go forward. We also see opportunities through targeted M&A to add to the channel with additional partnerships. And so it may very well be that as the year unfolds, quarter over quarter we'll see some growth opportunities as we execute on our plans. But that's more reflective of the growth trajectory in labs, coupled with the timing of business development.

Thanks.

I think we have time for about two more questions.

And your next question comes from the line of David Buck representing Buckingham Research. Please proceed.

HI, it's Jim Dawson for David Buck. Good quarter. I just had a question on your guidance, what approval activity do you have built in for generics overall and also what product losses, if any, from non-approved DESI products? Thanks.

So what we have built into our guidance is the expectation that in 2011 we would receive approximately 14 ANDA approvals from the combined portfolio, and we don't have any DESI products currently in our portfolio, so we don't see any product withdrawals as a result of that.

I would add that the nature of our generics business model, Endo on the generics side is not a heavy Paragraph IV shop, so we don't see the kind of seasonality or volatility of earnings, let me say, that you might see for generic competitors. And so the approval or unapproval is contemplated within the range of guidance. It's not a particularly volatile assumption for us. As well, with regard to the branded portfolio, we do note that Voltaren Gel lost its marketing exclusivity at the end of October of this year. We've looked thoughtfully at the timing for potential generic competition. It's not at all clear to us that we will see generic competition this year, that's very much dependent on FDA action. But we've contemplated the range of possibilities in our guidance today.

Okay. Yes, and just on the OPANA franchise, sales for the quarter came in a little later than we expected, can you talk about pricing there and inventory levels, discounting?

So we were very pleased with the sales of OPANA for the quarter. It has been nicely exceeding our expectations throughout the year. We do see very attractive script trends for the product itself. We have some fluidity on the pricing side reflecting our contracting strategy, and so year over year as we improved access last year, we've seen some shift in mix among our different books of business. But net/net, fairly modest in nature. I think the other uptick for us on OPANA has been a shift in the mix of dosage strengths, with more of the sales coming this quarter from the higher dosage form strengths which favorably contribute to sales growth quarter over quarter on a year-over-year basis.

Okay, thank you. And lastly, you gave this earlier, could you just -- I may have missed it, just the tax rate assumption for 2011? Thanks.

Yes, we're looking at a 30% effective tax rate on an adjusted basis for 2011. The fourth quarter saw a couple of favorable considerations that were discrete for the quarter. First, you had the renewal of the R&D tax credit retroactive to January 1 of 2010, so we have the full year impact of the R&D tax credit in our fourth-quarter 2010 results. That will be treated more ratably over the quarters in 2011. And then secondly, consistent with all of the transactions that we did in 2010, each of them carries different types of tax attributes. And as we finalize the necessary studies to substantiate those tax attributes, we saw favorability in those as well. That will also be treated on a more ratable way over the course of 2011.

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

And your last question comes from the line of Louise Chen representing Collins Stewart. Please proceed.

Hi, thanks for taking my questions. Just a few here. First, can you give any color on your organic sales and earnings growth targets over the next several years? And then secondly, can you provide an update on your Lidoderm IP?I think I saw you have one of the Elec-Tech patents now listed in the Orange Book. And the last question is on HealthTronics, basically is $50 million a good run rate for that business going forward?

So starting with HealthTronics, I think that for the base business, we think that the core business, $50 million is a reasonable number. We obviously expect to see growth from that. But these are very stable, long duration cash flows and so we feel very confident in growing off of that base. You will see growth, as Julie alluded to, coming from the labs business. You will also see growth coming from the potential to broaden the channel with follow on M&A activity. And wherever we see that opportunity in lithotripsy, there's usually an opportunity to turbo charge that in some of the laser and cryo prostate cancer therapies as well. So net/net I think $50 million is a good starting point and then growth from there. I'll think ask Caroline to talk about the IP position on Lidoderm and then I'll drop back on organic sales and earning targets.

Sure. We-- there are four patents covering Lidoderm. The two [Hine] patents that expire in 2012, (inaudible) patents by (inaudible) 2015, and yes as you noted the Elec-Tech patent which expires in 2014.

And then with respect to sales and earnings targets, we have not put in the public domain any medium-term guidance on that. We are particularly excited about the growth opportunities in 2011. You're obviously seeing very robust growth at both the top and the bottom line. We have a history of leveraging top line growth for bottom line growth as well with margin improvements and improvements in our tax rate and we'll continue to execute on that. And so we think the future is pretty bright for us over the next several years as we continue to execute on our core business and build out a more diversified healthcare Company.

Let me just add one other note. I think the opportunity with HealthTronics, yes financially an expansion of our capabilities both in service and device, but strategically it's critical to the way we see the world going forward in terms of being able to have a channel directly into the urology market at the point of care. So again, as we deliver certainly products within that HealthTronics portfolio, but we also want to further expand and develop the relationship directly at the physician level.

Thank you.

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

Well, again, I'd like to just reinforce the three messages which is strong execution of in the fourth quarter and the year, both financially and operationally, increasing 2011 financial guidance and lastly, the launching of FORTESTA. I think this is a byproduct of both execution from the leadership team and our employee base as well as really strategic discipline. So as we continue on our quest to obviously be a leader in the field of this new healthcare environment, we think we have the -- now the breadth and depth of a -- both a product line and its capabilities. And again we feel we're on the right path to intersect with-- where healthcare is transitioning to. So on that, I look forward to again continuing to report out quarter over quarter this year and again, thank you for your support on this call. And take care.

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