Endo International PLC (ENDP) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Endo Pharmaceuticals Holdings Inc earnings conference call. My name is Lacy and I'll be your coordinator for today. (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 of Corporate Affairs. Please proceed.

Great. Thanks, Lacy. Good morning, everybody, 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, Chief Scientific Officer; and Alan Levin, 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 the call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States, and that may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Endo's current report on Form 8-K filed with the SEC for Endo's reasons for including those non-GAAP financial measures in 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 would like to turn the call over to Dave.

Thank you, Blaine. Endo had a great fourth quarter and another record year in 2011, with strong performance across every segment of our business. We had revenues of $803 million and adjusted earnings of $1.40 per share during the fourth quarter, and revenues of $2.73 billion and adjusted earnings per share of $4.69 for the full year. Earnings exceeded our guidance, reflecting our control of expenses, the strength of our core branded pharmaceutical business, and the contributions of our expanding generics, devices, and services businesses.

Our 2011 financial performance reflects the successful execution of our growth strategy, as well as the contributions and strengths of each of our business segments. For example, Endo's branded pharmaceutical business has been growing at double-digit rates as a result of strong demand for pain products, favorable formulary access, and successful promotional programs. Today, it represents not only a portfolio of successful drugs such as Lidoderm and Opana, but also a promising growth platform in which we continue to invest. We are addressing some of the short-term challenges in branded product supply and are confident that the focus of investors will soon return to the positive sustainable growth story of our diversified business, with multiple drivers for growth in 2012.

The recent approval of the new formulation of Opana ER was an important milestone for our pain franchise, and will contribute meaningfully to our revenues this year. We have expedited our plan to convert our Opana ER franchise to the new crush-resistant formulation. We are on track to complete this effort shortly, and importantly, we are excited about the opportunity to invest for growth in Opana ER. It is a product that now, with the addition of a second patent this week, has exclusivity through 2024.

Regarding Lidoderm and the current litigation with Watson, I'll reiterate comments I made earlier this year. We understand the value of this franchise and the maximization of its value for our current and potential investors, and we believe that there is value in resolving the market uncertainties with respect to the anticipated cash flows from this product. We find that there is an opportunity to fairly value the interests of all parties in achieving certainty, and we look to do so. We value innovation throughout our business and acquisitions have diversified our revenue and cash flow and believe we have positioned the Company for continued long-term growth. Our focus in the year ahead will be to complete the integration of all of our businesses, build on our leadership in pain management, and strengthen our emerging leadership position in urology.

To better reflect how we operate our diversified Company, we now intend to report four segments going forward; branded pharmaceuticals, generics, medical devices, and services. As we pursue this plan, we anticipate continued solid revenue growth across our business segments. And combined, we project 2012 revenues of $3.15 billion to $3.30 billion, and adjusted diluted earnings per share of $5 to $5.20. Our guidance reflects the temporary impact of the Novartis plant shutdown on our 2012 performance. And Alan and Julie will dive deeper into the details of the Novartis effect, the actions we're taking, and how we're setting expectations for the remainder of 2012.

We expect record operating cash flow in 2012 of between $750 million and $850 million, which we will use to reduce our outstanding debt, along with implementing new programs across our urology franchise, and continuing the integration of our expanded diversified businesses. Although we will continue to evaluate potential businesses and products to acquire, our priority continues to reflect a primary focus on paying down our debt.

Now, I would like to turn the call over to Julie to describe in more detail what is driving our performance and what lies ahead for our enterprise. Julie?

Thank you, Dave. Our 2011 commercial performance was exceptionally strong, particularly within branded pain pharmaceuticals. Opana ER net sales grew 46% in the fourth quarter, on prescription growth of 40%, driven by good formulary access and strong demand. In January, we announced a temporary supply constraint for Opana ER, driven by Novartis' voluntary closing of its facility in Lincoln, Nebraska. Since that announcement, we've made considerable progress towards minimizing the supply disruption, and I would like to share some updates with you now.

In late January, we resumed manufacturing activities for Opana ER at the Novartis facility in Lincoln. The production of Opana ER at the Lincoln facility is limited to the remaining API quota from our 2011 DEA allocation, but it's an important part of meeting patient needs, and we have started to ship product from this facility this week. We are also working with our partner, Grunenthal, and their manufacturing partner, PMRS, to accelerate the introduction of the new formulation of Opana ER designed to be crush-resistant.

We have initiated production of the new formulation and certain doses have already begun to ship. We expect manufacturing of the new formulation of Opana ER to achieve scale, and start to fully supply market demand by late March or early April. What's important is that we believe the Opana ER supply disruption to be temporary and we expect a successful return to promotional efforts shortly. Our proactive approach to communications and the continued strong relationships with our customers lead us to expect a strong second half for Opana ER with attractive full-year growth for the franchise.

Voltaren Gel net sales grew 23% in the fourth quarter on prescription growth of 34%. However, supplies of Voltaren Gel have been temporarily constrained to a greater degree than we previously anticipated, all as a result of the Novartis plant shutdown. We are working with Novartis to initiate production at an alternative facility. The precise timing of the initial resupply date remains somewhat uncertain. However, at this point, we expect resupply to begin during the early second quarter, and to be able to reach commercial scale by the end of the second quarter. We would expect to return to promotional activities at that time. Again, we expect the strength of our commercial model to make that return successful, and we expect second-half growth for Voltaren gel.

Lidoderm, for the treatment of PHN, reported net sales growth of approximately 12% in the fourth quarter. That growth is driven by scheduled changes to the contractual royalty obligations for Lidoderm, as well as continued low single-digit organic growth through a combination of pricing benefit and volume growth. The steady performance from Lidoderm, coupled with the outstanding growth in Opana ER and Voltaren gel, have combined to lead our branded pharmaceutical segment to top line growth in 2011 of 16% versus 2010.

Our generic pharmaceutical segment had a very strong year, delivering pro forma growth of 23% in the fourth quarter versus the fourth quarter of 2010, driven by our strong commercial portfolio, the launch of 10 new products, and the successful integration of Qualitest into Endo. Finally, for generics, we expect a consistent pace of ANDA approvals will continue to create long-term growth potential for this franchise.

Moving on to our medical devices segment, sales declined 3% on a pro forma basis versus fourth quarter 2010. Medical device sales grew 5% on the same basis, if you exclude women's health, where sales were effected by a reduction in procedural volume following the September FDA advisory committee meeting about the use of surgical mesh products. Endo supports FDA's recommendations that physicians be well-trained and patients fully understand the risks associated with the use of mesh products, and we remain confident in the long-term prospects for the women's health business. We believe that these procedures can help millions of women suffering from pelvic organ prolapse and stress urinary incontinence.

On a pro forma basis, net sales of AMS's men's health products, including the artificial urinary sphincter and erectile restoration devices, increased by 7% in the fourth quarter of 2011 versus prior year. We anticipate strong revenue growth from this AMS line of business, as well as from the BPH laser therapy business in 2012. On our last quarterly call, I mentioned that we were launching a number of new pilot programs in urology. These include cross-selling of Fortesta gel by Endo's urology sales team and AMS's men's health team. In addition, offering Endocare cryoablation therapy through AMS representatives, and adding the AMS GreenLight Laser to the HealthTronics portfolio.

We've tracked the performance of the Fortesta gel pilot, believe that there is incremental value to be created, and expect to scale this program nationally in the first half of the year. We also believe the AMS men's health business will benefit from Endo's expertise in providing customer service for reimbursement support and have expanded our patient reimbursement support services to accommodate the AMS men's health franchise. We'll continue to create and test pilot programs that have the potential to create value through more effective relationships with the urology community, and I look forward to providing updates as we identify and scale the initiatives that demonstrate success.

That concludes my prepared remarks. Now, I'll turn the call over to Ivan for an update on R&D programs. Ivan?

Thanks, Julie. As I'm sure most are aware, Endo announced in December 2011 the approval by FDA of our NDA for a new formulation of Opana ER that is designed to be crush-resistant. That approval was an important achievement and the second for my team in a 12-month period.

The team's skill and experience with pain therapeutics should benefit BEMA Buprenorphine, the latest addition to our late-stage pipeline for branded pharmaceuticals. BEMA Buprenorphine, licensed in January from BioDelivery Sciences International, is a Phase III asset that we'll study in the treatment of moderate to severe chronic pain. I'm excited by this asset because it has the potential to complement our pain therapeutics portfolio. The active pharmaceutical, Buprenorphine, is a known molecule and the delivery mechanism has been used successfully in other marketed products. Last week, BDSI received notice of a patent that, once formally granted, will extend the patented exclusivity of the BEMA drug delivery technology until 2027.

Successful development of BEMA Buprenorphine could provide Endo an opportunity to offer healthcare providers an important option in the treatment of pain. Commercially successful in Europe, we believe that a Buprenorphine-based product can be used to treat patients who suffer from chronic pain that is not well managed by a milder pain reliever, such as NSAIDS, but may not require more powerful opioid-based products. Thus, I believe there is a clear opportunity to leverage Endo's experience with the development and commercialization of pain therapies, and we're looking forward to partnering with the team at BDSI to jointly develop this important opportunity. Together, we started to plan for a mid-2012 initiation of two Phase III studies of BEMA Buprenorphine in the treatment of chronic pain.

Endo's diversification created an integrated pipeline that enables us to select the best opportunities across branded pharmaceuticals, medical devices, and generics. We have recently rebalanced our pipeline programs and have chosen to accelerate some promising growth opportunities in our medical device portfolio. And we remain excited about the approximately 50 ANDA filings that we have under review at FDA, that will continue to supplement the growth of that business.

I'll now turn the call over to Alan.

Thank you, Ivan. Endo had a strong fourth quarter and full year for 2011, and our operational strength, along with a full year of reporting for AMS, drives the increase in our financial guidance for 2012.

I'll start today with a review of our fourth-quarter 2011 results. For the fourth quarter, we had total revenue of $803 million, up 57% over the fourth quarter of 2010. For the 12 months ended December 31, 2011, we had total revenue of $2.73 billion, up 59% over the same period of 2010. On an adjusted basis, fourth-quarter 2011 gross margin was 71% of net sales. The decline versus fourth quarter 2010, consistent with our expectations, is driven by the addition of the full three months in 2011 of Qualitest with relatively lower gross margins, offset in part by the addition of AMS, with relatively higher gross margins.

Total operating expenses for the quarter were $396 million. However, on an adjusted basis, total operating expenses for the quarter were $280 million. This increase versus the prior-year adjusted total operating expenses of $177 million is driven by the partial-year impact of AMS. However, as a percentage of revenue, total operating expenses remain flat at 35%. Our adjusted effective tax rate for the fourth quarter of 2011 was 27.3%, and benefited slightly in period versus our guidance from favorable segment mix for pretax income, and a larger-than-expected manufacturing tax benefit.

Our reported diluted earnings per share decreased to $0.30 versus $0.77 in the fourth quarter of 2010. Asset impairment charges related to certain generic and branded pharmaceutical development projects drove the year-over-year decline. And for the year, Endo is reporting diluted earnings per share of $1.55 versus $2.20 in 2010. Adjusted diluted earnings per share increased 32% to $1.40 versus $1.06 in the fourth quarter of 2010. And for the year, adjusted diluted earnings per share increased 35% to $4.69, and exceeded our guidance and consensus expectations. Overall, we had a strong fourth quarter and full year 2011. For additional details of our 2011 financial results, please review today's earnings press release.

Moving on now to our 2012 guidance, we expect total revenues of between $3.15 billion and $3.3 billion, or more than 15% growth versus 2011 revenue. The increase in revenue is driven by operational trends within our branded pain franchise and generics business, coupled with a full year of reporting of AMS. We believe our guidance contemplates a range of outcomes related to certain assumptions, including recovery from the Novartis supply disruption and the recent procedural volume pressures in the AMS women's health business. We estimate adjusted diluted earnings per share in a range of $5 to $5.20, or an increase of 7% to 11% versus 2011 adjusted diluted earnings per share. Reported or GAAP diluted earnings per share are now expected to be within a range of $2.60 to $2.80.

On an adjusted basis, we expect our corporate gross margin as a percentage of revenue to be between 68% and 69% in 2012. With the full-year impact of last year's acquisitions, we expect growth in adjusted expenses for both SG&A and R&D. Though as a percentage of total revenues, we expect both of those line items to decrease slightly. This is the sixth consecutive year of margin improvement in operating expense as a percentage of revenues.

We anticipate an adjusted effective tax rate of approximately 30.5% to 31.5%, an increase versus 27% in 2011. This increase is driven by the inclusion of a full year of AMS earnings that are subject to a full US tax rate. We will, as we have historically, continue to look for opportunities to improve our adjusted effective tax rate. Finally, for full year P&L guidance, we believe that diluted weighted average shares outstanding of approximately 122 million shares would be a reasonable share count assumption for 2012.

While we normally refrain from providing quarterly guidance, we recognize that the first quarter might be challenging to model without our providing some additional color. We expect the effects of the temporary supply constraints linked to the Novartis facility closing to have a disproportionate effect on first-quarter results. Precise timing of shipments is still a fluid situation, and we expect to report only intermittent sales for Opana ER and no meaningful sales for Voltaren Gel in first quarter 2012.

The Voltaren Gel supply interruption is expected to have a more significant impact on first-quarter and full-year 2012 sales than previously anticipated, as we have unexpectedly been unable to release inventories previously produced at the Novartis facility in Lincoln, Nebraska. In recognition of these transient factors, we believe our adjusted diluted earnings per share for first quarter 2012 will likely be below $0.90 per share. As production scales, however, to meet demand and then rebuild trade inventories, we expect that sequential quarterly growth will result for the remainder of the year and drive a strong second-half performance.

We expect the Company to generate record cash flows from operations of between $750 million and $850 million in 2012. That strength should provide the flexibility to invest in the business for sustainable growth, while repaying debt to achieve our targeted debt to EBITDA ratio. Repayment of debt remains a top use of our strong operating cash flow. We achieved a record of $702 million in cash flow from operations in 2011. During the fourth quarter, we paid down $140 million in term loans, and our debt to EBITDA ratio stood at three times as of December 31.

As a result of our strong outlook for cash flow from operations, and our focus on balance sheet strength, we expect to pay down another $220 million in first quarter 2012. We remain confident that we will be able to achieve our target ratio of 2 to 2.5 times debt to EBITDA in 2013. This concludes my prepared remarks. And now I'll turn the call over to Blaine. Blaine?

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

(Operator Instructions). And our first question will come from the line of Gregg Gilbert with Bank of America-Merrill Lynch. Please proceed.

I have a two-part question on Lidoderm. The first part is, I think, for Ivan. Have you learned anything new in the past several months on the likelihood of the FDA approving a generic Lidoderm? Anything new on that front? And the second part of the question is, Dave, you mentioned that you would be open minded in the past and today about reaching certainty if the terms can be agreed upon. Is your key partner on Lidoderm on the same page as Endo is, when it comes to potentially taking an economic hit in exchange for certainty, and are there any other complicating factors that those of us on this side may not fully understand? Thank you.

Yes, Greg. Thanks for the question. I think it does highlight, again, it takes two parties. And at this point, yes, I do believe that both parties are open. I don't see anything other than, as always, getting a fair deal across both parties. And we're working on that. Discussions have been engaged, but until we can see ourselves through that, then that's it.

And I would add, Greg, Teikoku, our manufacturing partner on the product works lock-step with us as we evaluate the opportunities here. With regard to Lidoderm, we remain very confident in our regulatory position. We see an evolving regulatory landscape which favors the need for clinical and efficacy end points as part of the demonstrating bioequivalence for this work, and we remain encouraged by what we're seeing at the FDA.

Thank you.

And our next question will come from the line of John Boris with Citi. Please proceed.

Thanks for taking the question. Just one Lidoderm-related and then one Opana-related. It would seem as though you have certainly learned a lot on the filing strategy of the party that you're in negotiation with. What is your intention around wrapping some of that into a citizens petition and potentially filing that with the FDA? And then secondly, on Opana ER, currently seems that the wholesaler level the 5 milligram and 10 milligram are on allocation. The other strengths, 20, 30, 40, appear to be out of stock with a potential date of restocking around March 31. Can you confirm that date? And then secondly, how do you plan on supplying the conventional formulation relative to the TRF formulation on those strengths that you're currently out of stock? And then related to that, when you do launch TRF, what we saw was during the switch process for Oxycontin, a downtick in scripts related to the launch and switch. What do you plan on doing differently that would potentially alleviate that downtick in scripts? Thanks.

John, thanks for your questions. I'll take the question on Lidoderm and then Julie will comment on Opana. With regard to Lidoderm, I wouldn't want to speculate on our regulatory strategy at this point in time. We do believe that there is a lot of data that increasingly demonstrates that there is tremendous value in clinical end points that demonstrate bioequivalency for topical products. And we remain very encouraged by what we're seeing at the FDA at this time.

With respect to your question, John, on Opana ER, the strategy right now is to use up the inventory that was produced late 2011, plus the new production coming off of the Novartis facility of the old formulation, and begin to introduce the new crush-resistant formulation on a dose-by-dose basis over the course of the next several weeks. So right now, we have begun shipping some limited quantities of the crush-resistant formulation on some of the lower doses of Opana ER, while we are releasing batches on the old formulation for some of the higher doses out of Novartis' Lincoln, Nebraska facility. As we deplete those inventories, we'll begin shipping the new crush-resistant formulation of the higher dosage forms. We would expect that by the end of March, we would have depleted all of the old formulation of Opana ER in the marketplace and only be shipping the new formulation of crush-resistant formulation. So we would expect that by April, the only product in the channel will be the new formulation. And we would begin, our anticipation is to resume demand generation activities in early April.

And Julie, just on the switch, the Oxycontin scenario on the downtick in scripts that we're seeing there relative to your strategy to try and ameliorate that?

Well, keep in mind that when Oxycontin switched from their old formulation to their new formulation, they did that over a period of about six months. That was their strategy to essentially effect a slower conversion. Given our current situation and our intention to fully convert the Opana ER market to the new crush-resistant formulation, we're executing a much swifter swap-out, if you will. In addition, there were a number of factors that affected the Oxycontin TRx trends when they introduced their new formulation, not least of which was a product that was different in appearance, that some patients identify difficulty in swallowing the pill, and had a slightly different PK profile from the original formulation. So there were a number of other circumstances that affected the trends for Oxycontin switch-out. The crush-resistant formulation of Opana ER is very similar in appearance to the old formulation, has a very similar PK profile. So we anticipate that the switch-out will not effect our underlying strength in our TRx trends.

Thanks.

And our next question will come from the line of Shibani Malhotra with RBC Capital Markets. Please proceed.

Hi, guys. Thanks for taking the question. Just a couple. Just following on the question on Opana TR, can you talk about your expectations for regaining share, once you have full supply? Our understanding is that you're going to ask doctors not to initiate new patients on the product right now. So how does that work? How should we be thinking about that?

And then secondly, in terms of the switch for Oxycontin, some of it was, patients were abusing the drug. Can you talk about how much of the Opana ER is actually abuse population and what your expectations are for that? And then finally, if you're willing to answer this question, I think, Dave, you talked about a value for Lidoderm. So if you or Alan could kind of talk us through what you would consider a fair kind of timeframe for when a generic would come in for Lidoderm. Thank you.

Hi, Shibani. It's Julie. I'll take the first part of your question and it was with respect to our expectations on Opana TRx activity with respect to the switch-out of the new formulation. We remain confident that we will be able to build demand apace with where we exited 2011, and as you recall, we've exited with fourth quarter demand of about 40% growth over prior-year quarter, and we're confident that we'll be able to regain that momentum with our brand. The way we market Opana ER has been very much focused on physicians who we know to be reputable pain specialists and we take careful efforts to ensure that our product is being appropriately used to minimize any potential risk of abuse.

We have since the launch of the product, we have initiated a risk map program, which is steeped towards heavily educating both physicians and patients on the appropriate use of opioids, and those efforts will continue. We're actually very excited to have this new formulation launch into the marketplace. We appreciate and understand that there are misuse and abuse issues with new class of products and we believe the new crush-resistant formulation is a nice step forward in trying to mitigate that situation.

I was just going to comment, you can obviously, Alan, take it a little bit deeper. Relative the comments I made relative to us arriving at the correct value between two parties, I'm not going to make any comments specifically on that other than, again that's part of a fair deal and we'll take that negotiation in a private manner and certainly work towards an end that I think everybody will be able to benefit from. Alan?

The only thing I would add is that our 2012 financial guidance assumes continues exclusivity on Lidoderm for the full year.

Yes.

Okay, great. Thank you.

And our next question will come from the line of Corey Davis with Jefferies. Please proceed.

Thanks very much. I have two questions. I'll ask them sequentially. The first is, now that Opana TR is starting to go out the door, can you elaborate more on what plans you might have to conduct some epidemiological studies to look at the improvements in the real world abuse and deterrents?

Well, yes. Hi, Corey, it's Ivan. Certainly this is something we're looking into as we go forward and we're obviously following what's going on with some of the ongoing epidemiological studies, and as we look at the data coming out, I think we're going to try and think about studies that will supplement some of that information.

We are struck by the pace at which Purdue was able to come forward with that post-approval studies, that demonstrated the value of the product in reducing abuse and misuse of opioids, and certainly the ability to bring the crush-resistant formulation to the market earlier in the year than previously anticipated, provides an extra window in that regard for us.

And I would just add that we're very encouraged by some of the early results coming out of some of the epidemiological studies that have been conducted by some other products in this class, and we're very encouraged by the fact that these crush-resistant types of formulations are in fact having a demonstrable impact on misuse and abuse of opioids.

Clearly, with this IP now going out to 2024, that gives us ample opportunity to design appropriate studies, and time to conduct them.

Okay, great. The second question is something you've kind of already addressed, but for the patients that you lose on both Opana and maybe more so on V-Gel, how can you recapture those patients best? What are your plans to do that? And how should we think about the pace at which you can regain the share that you lose from the actual product shortages?

Corey, obviously our focus in the first quarter of this year for Opana ER was to ensure that we minimized any out-of-stock at the patient level. And we think that the efforts that we have undertaken have gone very far in terms of achieving that. We do anticipate that some patients will be switched off of Opana ER before they are fully -- before we fully resupply the marketplace. However, in our conversations with physicians, they are already planning to switch those patients back.

Opana ER is a product that has inherent characteristics that make it a product that physicians and patients both want to use. We have a very favorable side effect profile relative to cytochrome P450 metabolism and drug/drug interactions, as well as a true BID dosing regimen. So this is a product that physicians and patients are becoming increasingly more comfortable with and believe that it is a better product than some of our competitors in terms of treating patients with moderate to severe chronic pain. So we're confident that as we resupply the market, we'll be able to get those patients switched back to Opana ER. Our anecdotal conversations with physicians suggest that and indicate that, as we've managed through this situation.

And similarly, with V-Gel. V-Gel is a relatively unique product. It's the only topical NSAID available on the market to treat pain and we believe that physicians are very eager. They ask us unsolicited questions about the availability of V-Gel and are monitoring the supply situation so they can reignite their use of V-Gel. So, again, we anticipate that we'll be rebuilding that demand, the demand curves for both Opana ER and V-Gel in the second quarter and expect to be back by the third quarter to demand levels that are more in line with where we exited 2011.

Yes, so as you've heard, we expect a quick rebound in these franchises. We've been very proactive in our communications, as Julie has outlined. And we're a leader in pain management. And that translates into deep relationships with doctors and decision-makers, like payers, that can be leveraged as we've spoken to them throughout the situation and as we exit it.

Okay. That's all I had. Thank you.

And our next question will come from the line of David Amsellem with Piper Jaffray. Please proceed.

Thanks. Just a couple. Regarding Voltaren, I believe you had mentioned in January that you had already had begun plans to transfer to another specific Novartis facility. So I guess the question is, do you know what facility it's going to be made in, is the issue just technology transfer, maybe elaborate on what's happening here that has led you to say that the constraints are worse than what you originally thought? And then the second question is on Buprenorphine, do you feel like you've identified what went wrong in the Phase III conducted by BDSI and what you think you'll do differently in the next study? And I realize you're testing opioid-naive and opioid-experienced patients in separate studies, but beyond that, what else are you doing differently to avoid the pitfalls that BDSI had in their Phase III? Thank you.

Okay, David. This is Julie. With respect to V-Gel and our thoughts in January, we at that point in time had identified a secondary source of supply for Voltaren Gel manufacturing and that is the Novartis site in Weir, Germany. That facility is currently making commercial quantities of Voltaren Gel for markets outside of the US. We had also, in January, anticipated a more rapid restart of production at the Lincoln, Nebraska facility. And unfortunately, the re-start has been delayed, and so we're at this point in time, the first commercial batches to resupply the market will be coming from Germany as we begin to work with Novartis to get the facility in Lincoln, Nebraska restarted. Again, we were more hopeful in January that we would be able to get some batches that were on hold, pending the outcome of the voluntary shutdown at Novartis, and that inventory has not been able to be released and so that, coupled with the start-up time in Germany to get our packaging components over there and produced, has led us to now believe that we will be essentially restocking the trade inventories come second quarter.

David, hi. Ivan. Thanks for the question on BEMA Buprenorphine. Look, we're very excited about it. It's a proven technology and Buprenorphine, as I said earlier, it's clearly a known and effective therapy for pain. It's been shown to be so. Pain studies are difficult and it's unfortunate when one goes down, but there were some really strong signals coming out of that program. We're very confident that we can bring it across the line, both in, both opioid-naive and -experienced patients. We've spent a lot of time with our colleagues at BDSI looking at the dosing regimens, the size of the study, and between us, there's a tremendous amount of experience. As I said, we're going to apply all of that to this program. We hope to get it up in the middle of this year and we're going to drive it forward fast.

Okay. Just one quick follow-up, is the dosing in these next studies similar or the same as what was tested in the last Phase III?

As I said, we're working through the dosing regimens with our colleagues at this point and we're going to arrive at them pretty soon. But at this time, it would be a bit premature to say exactly what the dose is.

Got it. Okay. Thanks a lot.

And our next question will come from the line of Ken Cacciatore with Cowen and Company. Please proceed.

On Lidoderm, just wanted to go back to that. Is there anything you can highlight or be specific about that was learned about Watson's ANDA during the trial that you didn't maybe know going in or could prove helpful to you? And secondly, you've mentioned a couple times interaction with the FDA has given you confidence. Is that interaction or signals that you're seeing, is this more recent than previous discussions? Is there anything you can be specific about, about any change in interactions with the Agency? Thank you.

Well the FDA has to approve any generic version of Lidoderm and substantial questions really remain about the timing, the process, the requirements for an FDA approval. New information is always coming out, either in FDA interactions, or in a setting like the trial itself. We filed the citizens petition with the FDA. It explains why generic manufacturers should, in our view, be required to conduct clinical safety and efficacy studies to prove their products are equivalent to Lidoderm, and we believe that, that's a necessity for demonstrating that local-acting topical products like Lidoderm need that kind of clinical work to come to market. We believe that testimony at trial provided some further support for this position.

Okay, thank you.

And our next question will come from the line of Chris Schott with JPMorgan. Please proceed.

First question, and I appreciate the color on the supply interruption. I know you're anticipating pretty quick rebound in these businesses. Specifically, how much sales and earnings impact from the supply interruption are you reflecting in your overall guidance given some of this lost business? Second question was the stepdown in gross margins in 2012 relative to the second half of 2011, can you elaborate a little bit more on what's driving that? And then a final question on the mesh business. What type of declines are you anticipating in 2012? And can you just elaborate what you're doing to stabilize this business and how confident are you that you can actually see a recovery in mesh over time? Thank you.

Yes, so Chris, on your, on the various questions, first of all, with regard to gross margin and the stepdown, it really is a function of product mix and segment mix. When we look at some of the head winds we're facing with the Novartis disruption, as well as mesh, products like V-gel and Opana are all high-margin products, and so that has a pressuring effect on gross margin for the full-year. And so we do see more pressure than we would otherwise have seen in 2012. We do have the benefit of a full year of AMS, which is an up-driver on gross margin. That is a partial offset on that.

With regard to the impact of the Novartis disruptions, we do have that baked into our guidance. It has been partially offset by a number of cost containment measures that we have put in place across our business, and we think that we've struck the right balance between constraint in our current year P&L versus investments in our P&L to support medium-term growth trajectory, which is very bright across all of our segments. And then, Julie, I'll ask you to comment if you would on the mesh scenario.

Sure. So with respect to the mesh products, we did see a decline in procedures for pelvic organ prolapse, and stress urinary incontinence in the back half of 2011. We're seeing some encouraging early signs in 2012 that looks like we have been able to stabilize that decline, and we're confident that with the continued focus on physician training, appropriate patient selection, and really providing the physicians with some tools to help have those appropriate benefit-risk conversations with patients, will allow us to get back to growth with the mesh franchise. So we do see 2012 as the year to stabilize and get back to growth.

Let me just add I think in all of this it's the backdrop, which Julie has already highlighted, which is the strength in terms of our positions in the products, whether it be pain or in urology. And I think the representatives that, that are the facing elements with our customers is very, very strong. So a lot of the questions about trend of recapture, as well as, again, stabilization and moving forward, I think is on the backs of very strong reputation the relationships that we have. And for that reason, we really overall feel comfortable about how we're going to move through what we consider right now a little bit of a slower start than we would like, but the momentum going into this, coming off of 2011 is very strong, and I think those relationships will build off of.

Okay, thank you.

And our next question will come from the line of Annabel Samimy with Stifel Nicolaus. Please proceed.

Hi. I just wanted to follow up on the prior question. So you mentioned that the $5 to $5.20 partly reflects the supply constraints. So does that imply that these aren't temporary hiccups, and that there actually is impact, because from my understanding, I thought there was supposed to be catch-up at some point in later quarters. And I guess the second question is the branded guidance is not particularly low. It's actually quite good. And so I want to get a better understanding of the gross margin impact. It seems like it's a little bit lower than what we would have expected with solid branded guidance.

Yes, so I think that there are a couple of considerations on this, Annabel. First, with regard to the supply constraints, obviously there is a timing impact on all of this, as it relates to depletion of trade inventories and also inventories at the retail level, and the pace at which we recapture scripts in that regard. We think that the replacement of wholesaler inventories is more or less a timing consideration for us. At the retail level, as we've outlined, we would expect a quick rebound in script capture as well, and as we reignite promotional effort, that has been pulled back from Opana and V-gel, given the supply constraint. We would expect an uptick in growth in these franchises.

Overall, I think we expect attractive year over year growth for Opana. We expect the second half we'll see nice growth for Voltaren gel, and the other piece in our pain franchise, apropos to your question on branded, is really the royalty contractual obligations with regard to Lidoderm. We had up until November of last year a royalty obligation to Hines Healthcare that was recorded under GAAP in our gross to net as part of net sales. That fell away in November. It was replaced by a royalty to Teikoku, our manufacturing partner and given the ongoing manufacturing relationship, that's a COGS-related royalty. And so net sales for Lidoderm this year will benefit from some change in the geography, although it's primarily a change in geography with only a modest incremental benefit to the P&L in terms of profitability.

Thank you.

And our next question will come from the line of David Buck with Buckingham Research. Please proceed.

It's Jim Dawson for David Buck. You got into this a little bit. I just wanted to get a little more detail if possible, just on the women's health business from AMND, could you just talk a little bit more about the outlook for 2012, got into the mesh business and stabilization into growth, but for 2012, on women's health, could you get into more of the quantitative metrics there? Thanks.

Well, typically we don't release product-related guidance, but what I can tell you is that we do remain very confident that we're facing into a temporary situation with the mesh franchise, coming off of the FDA committee meeting towards the end of relatively mid-September of last year. And we firmly believe that these products, used in these types of procedures, have life-changing impact to patients who are appropriate for the use of the product and the procedures. There's millions of women who suffer from pelvic organ prolapse and stress urinary incontinence. These procedures lead to permanent correction of those issues and we believe that once we get past this sort of market-uncertain time period that we're going to be able to return these products to robust growth.

And the other thing I just would point out is within the AMS business, we have our men's health business that is continuing to grow year over year. We exited fourth quarter with just over 6% growth. Our BPH laser business continues to be a growth driver for us. Our generics business is a significant growth driver for us. So we will be able to weather the temporary disruptions in the mesh and some of the branded pharmaceutical businesses and overall get these lines of business back to growth.

Let me just add, on the women's health, that's one aspect of it. I think the AMS franchise and the continued work on the international front is another opportunity of upside growth. So to everything that Julie had said, I think we're well positioned, again, with our ability to manage the various pieces of all of our business franchise to offset the particular downturns, whether it be product or in certain regions. We feel very good about, again, the diversity of where we sit right now.

Okay. Just one follow-up. So do you see revenue growth for the women's health business in 2012?

I think, again, the revenue growth in women's health is going to be somewhat of a work in progress, albeit to my earlier comment here about international, I think across the board, AMS looks very good, and we're going to continue to evolve the situation. So overall, very positive about where we're looking on the AMS franchise.

Yes, and I would say certainly what we're seeing are some, some indicators that procedural volumes have bottomed out, and are stabilizing. It's still a fluid situation, but those are the indications as we've been looking at monthly and weekly data. That positions us well to see some growth in the back half of the year. But to Dave's point, the international side is a pretty bright side, and what we've seen on the mesh procedural matter is that it is essentially a US issue. We're seeing very attractive robust double-digit growth in our women's health franchise in our international markets.

And just one last thing about mesh. Mesh, again, to Julie's comment, a valuable adjunct into maintaining quality of life, but the stress incontinence is another different procedure than the prolapse. So, again, both segments are different, and are growing at different rates. And so, again, I don't want to have it all lumped into one area. I think the women's health is a strong opportunity for us.

Thank you.

I think we have time for about two more questions.

And our next question will come from the line of Michael Tong with Wells Fargo. Please proceed.

Just a quick question, as you talk to doctors about switching patients temporarily out of Opana ER, what are you hearing in terms of the products that they are switching patients into, and is the mix of that shifting any different than what you would have expected?

In our conversations with physicians, we are not making any recommendations about what products to switch patients to. And, again, given some of the efforts that we have taken to minimize the patient-level out-of-stock situation, we don't anticipate that there's going to be a wholesale switching of patients onto other products, that we have to then switch back. We believe that a relatively small proportion of patients who were currently on Opana ER and well-maintained will be switched. And again, as I mentioned earlier, in our conversations with physicians, it's clear that they have strong intentions to switch those patients back to Opana ER, based on the inherent product characteristics of the product, once the product is back in supply. So we remain very confident that any disruption in demand will be short-term and we'll be able to regain our momentum coming out of 2011 and get the product back to double-digit growth.

Yes, Julie, maybe I didn't ask it quite the right way. Have the doctors told you what, what type of product they are switching patients into? Any competitive intelligence on that?

I don't really have any competitive intelligence to share with you, Michael. It's premature, based on any sort of syndicated sources that would be available. So it would be inappropriate for me to speculate on that. But again, what we are clearly hearing is physicians' intention to switch back to Opana ER when the product is resupplied.

Okay, thanks.

Thanks. And can we go to the last question, please?

And our last question comes from the line of Gary Nachman with Susquehanna Financial Group. Please proceed.

First, Ivan, could you give a little more on what you plan to accelerate in medical devices in the pipeline? And in generics, what are the number of approvals you're expecting for 2012? And how much of an impact do you think those will have this year?

Yes, Gary, certainly, look, as we've sort of mentioned previously, we've got a very exciting pipeline across the three pieces of the AMS business. In women's health, we're very, very much invested in bringing innovative, effective therapies to market, and we're going to be investing innovation in the mesh area. In the male health area, we're looking at innovation in the penile implants. We have other programs ongoing, particularly in some of more the colorectal area. And we're investing significantly in our cryotherapy business. We're looking at next-generation cryotherapy and other opportunities to utilize cryotherapy, because we're very excited about that, too.

And in our generics business, we currently have 54 ANDAs under review at FDA. Last year, we received approval for approximately 12, and we would expect that the new approvals would stay around that pace going forward. And new product launches are just one of many growth drivers in the generics business, so we remain confident that we can continue to grow this business through a combination of optimizing our commercial portfolio and launching new products. That's the plan.

And, again, relative to the questions relative to the device, I think the overall element is the strength we put into the urology channel. I think the channel there, along with the unique products that AMS brings, HealthTronics, and the diagnostic, most recently now the data set from the two acquisitions in the electronic medical records really gives us a stronger equation beyond products, a real strong value equation for the urology practices. And so all of that, I think, will amplify and give us strong growth in 2012.

Okay. And one last one, Julie, just another way of asking Michael's previous question, what type of reaction have you seen from your competitors on the Opana ER, Voltaren shortfalls? Have they been aggressive in trying to fill the gap? I'm just curious what sort of noise is out there and if that could be a hurdle for you guys. Thanks.

What we've seen is that we're really building on our leadership position in pain management. Our customers have been very supportive of this short-term supply interruption. They have been very willing to work with us on managing current patients who are well-controlled on Opana, on refraining to start new patients on Opana until we're through this period of time, and we expect that by April, when we're resupplied in the market, that we'll be able to go back to full growth. We're not aware of any nefarious competitive activity. We think that again, that would not sit well with physicians who are big supporters of Endo's pain management portfolio.

Okay, thanks.

I would like to kind of wrap up. Thanks, everybody, for joining us today. Jonathan and myself will be available throughout the day for any additional questions that we can help answer. Thanks very much for joining us. Take care.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.