Endo International PLC (ENDP) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q2 2012 Endo Health Solutions Inc.'s earnings conference call. My name is Sonja and I will be your operator for today. At this point all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Blaine Davis, Senior Vice President of Corporate Affairs. Please proceed.

Good morning. Thank you for joining us today. 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 will open the call to take your questions.

I'd like to remind you that any forward-looking statements by Management are covered under the Private Securities Litigation Reform Act of 1995 and subject to change, risks, and uncertainties described in today's press release and in our filings with the SEC. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and 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'd like to turn the call over to Dave.

Thank you, Blaine. Endo had a very solid second quarter with revenues of $785 million and adjusted earnings of $1.27 per share. These results reflect a number of variables affecting our business, including the resolution of previous short-term supply constraints, improved pricing for Qualitest products following a sales shift to higher margin products, as well as a lag in prescription and pharmacy restocking for OPANA ER following the first quarter supply interruption. We implemented a number of efforts to increase sales of the new formulation of OPANA ER, and adjusting our revenue guidance for the year to the range of $3.05 billion to $3.175 billion, to largely reflect the slower recovery effort. Sales of Voltaren Gel and generics have been very strong and partially offset the OPANA ER disruption. In addition, we will focus on further improving our operating efficiency during second half of 2012, and as a result, we are maintaining our previous guidance for adjusted diluted earnings per share of $5 to $5.20. Alan will say more about our guidance in a few minutes.

There are several positive developments I'd like to highlight. In May, we resolved our litigation with Watson regarding Watson's generic form of LIDODERM and eliminated a significant uncertainty. The settlement protected our intellectual property interest and avoided further costly litigation and the risks inherent to litigation. Most important, the settlement requires Watson to obtain FDA approval of its generic version before it can enter in the market. In addition, the settlement allows us to prepare for the potential launch of a generic lidocaine patch with greater certainty. That remains an event that we expect no sooner than late 2013, if at all.

Last month, we announced the appointment of Camille Farhat as President of American Medical Systems. This was a significant development for our medical device and procedure business. Camille brings a very strong background in pharmaceutical and medical technology, including exceptional operating, marketing and leadership skills from his previous work at Baxter, Medtronic and GE Healthcare. He has demonstrated an ability to focus on the needs and concerns of patients and to lead complex and competitive global business, and I'm confident that he can apply his expertise effectively at AMS.

The recent rebranding of parent Company Endo Pharmaceuticals to Endo Health Solutions is helping our organization focus on therapeutic areas and disease states as pathways, not just product opportunities. This rebranding is a reflection of a business philosophy that will be the key to our long term success as we work to expand the value proposition with all of our customers. We've built relationships with approximately 70% of the 10,000 US-based urologists, and that complements our presence in pain where we have relationships with the vast majority of the US-based pain specialists that we believe have high value. We believe that our remaining focus in urology and pain therapeutic areas that are supported by aging demographics, Endo can build a business with strong prospects for long term growth.

Finally, I'd like to commend Ivan Gergel's R&D organization, as well as our development partners at BioDelivery Science International. We just announced the initiation of the Phase III development program for BEMA Buprenorphine in the treatment of moderate to severe chronic pain, and we look forward to providing updates as this potential driver of future growth progresses in its development program. In summary, we had a good second quarter in which we satisfactorily resolved several key issues, advanced new products, clarified our near term challenges, and continued our pursuit of the right strategies for long term growth. Now, I'd like to turn the call over to Julie to describe in more detail our second quarter performance. Julie?

Thanks, Dave. As Dave mentioned, and Alan will detail further, we have adjusted our expectations for OPANA ER sales in 2012, but remain confident in prospects for growth and durability of this key franchise. The transition to the new OPANA ER designed to be crush-resistant is essentially complete. Approximately 90% of the prescriptions filled during the week ended July 27 were filled with the new formulation. During second quarter, we identified some key gaps affecting patient access to the new formulation that we believe we can close and in doing so, reignite the growth engine for OPANA ER. The efforts we initiated are focused on pharmacies, physicians, and patients. We believe that the prospects for returning OPANA ER to growth remain strong and we are encouraged that the prescription trends stabilized during July. I'll be happy to discuss the details of our efforts further during the Q&A.

Voltaren Gel, which was also affected by the Novartis facility closure, had a very strong rebound in the second quarter and exceeded our expectations. Net sales of nearly $44 million for second quarter reflect a strong recovery in prescription trends as well as the complete rebuild of wholesale and retail inventory levels. Overall, we're pleased by the recovery for Voltaren Gel and we expect to continue to grow prescription volumes during the second half of 2012. Net sales of LIDODERM, the treatment of PHN, increased 16% compared to the second quarter 2011 sales. As discussed previously, the major driver for sales growth this year is the benefit from the change in royalty payable to third parties from this product. Excluding that effect, LIDODERM continues to produce low single digit growth from a combination of prescription volume growth and modest price increases.

Net sales of generics returned to strong double digit growth in the second quarter. Strong demand for our established product portfolio and in some areas, favorable pricing, combined to produce 20% growth versus the second quarter of 2011. The stable pricing environment helped us produce adjusted gross margins of more than 40% in the generic sector for a second consecutive quarter. We have also been focused on increasing manufacturing capacity at Qualitest through a combination of process improvements and capital investments. I'm happy to report that in June, we had a record month in manufacturing and produced approximately 1.5 billion dosage form equivalents. For the remainder of 2012 we expect the strong performance to continue at Qualitest, and we've narrowed our financial guidance for net sales in this segment to $640 million to $670 million for the full year.

Moving on to our devices segment, sales increased approximately 3% on a pro forma basis versus the second quarter 2011. Sales for the mens health business increased 40% versus prior year on a pro forma basis. As a reminder though, AMS temporarily withdrew the AMS 800 Artificial Urinary Sphincter from the market during part of the second quarter of 2011. After the return of that device to market in the third quarter 2011 we recaptured sales from procedures that were delayed. As a result, we expect the full year 2012 performance for mens health to normalize towards mid to high single digit growth. That concludes my prepared remarks. Now I'll turn the call over to Alan. Alan?

Thank you, Julie. Endo had a great second quarter, and I'll focus my initial remarks on our results and then comment on our prospects for the second half of the year and how those affect our full year 2012 financial guidance. For the second quarter, we had total revenue of $785 million, up 29% over the second quarter of 2011. As Dave said earlier, our revenues reflect improved pricing for Qualitest products following a sales shift to higher margin products resulting in an increase of 20% year-over-year in our Qualitest business. On a contribution margin basis, adjusted income for Qualitest was up 139% over second quarter 2011. On an adjusted basis, second quarter gross margin for the Company as a whole was 70% of net sales. This reflects stability in our profitability versus second quarter 2011, the inclusion of AMS, and continued strong pricing within our Qualitest business.

Total operating expenses for the quarter were $420 million; however, on an adjusted basis, total operating expenses for the quarter were $271 million. This increase versus prior year adjusted total operating expenses of $213 million is driven by the impact of AMS, which we acquired in mid June 2011. On an adjusted basis, total operating expenses as a percentage of revenue decreased to 34% as compared to 35% during the second quarter of 2011. In the second half, we expect growth in revenues coupled with reductions and expenses to continue to reduce adjusted operating expenses as a percentage of revenues.

Our adjusted effective tax rate for the second quarter of 2012 was 31.6%. The effects that the first quarter supply disruption had on measures like the adjusted effective tax rate have now largely normalized, and our year-to-date adjusted effective tax rate of 30.6% is in line with our financial guidance. Adjusted diluted earnings per share increased 21% to $1.27 versus $1.05 in the second quarter of 2011. Our reported or GAAP diluted earnings per share decreased 82% to $0.08 versus $0.44 in the second quarter of last year. The decrease was driven primarily by a non-cash pre-tax charge of $131 million taken this period to reflect the estimated fair value of the free goods that we expect to provide to Watson Pharmaceuticals per the terms of our announced settlement and license agreement.

Moving on now to our full year 2012 financial guidance. We are revising our guidance for revenues and reaffirming our adjusted diluted earnings per share in the range of $5 to $5.20 for full year 2012. We now estimate total revenues to be between $3.05 billion to $3.175 billion, an increase of 12% to 16% versus 2011. The revision of our revenue guidance reflects the latest script trends from the major products in our branded Pharmaceuticals portfolio, and the continuation of improved pricing in our Qualitest business. We expect to deliver adjusted diluted earnings per share in the range of $5 to $5.20 for full year 2012.

As we've highlighted in the past, we have a flexible expense structure that permits us to adjust our investment levels in second half 2012 to a level that we believe is more appropriate given recent top line performance. We're also focused on realizing additional operating efficiencies in the second half. To do that, we will reduce discretionary investments, accelerate synergy capture, and deliver improvements in manufacturing efficiency. We now expect reported or GAAP diluted earnings per share in the range of $1.07 to $1.27. On an adjusted basis, we continue to expect our corporate gross margin to be between 68% and 69% in 2012. With the implementation of a cost savings initiative, we continue to expect SG&A and R&D as a percentage of total revenues to decrease. This is the sixth consecutive year of margin improvement in operating expenses as a percentage of revenues.

We continue to 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. We are modestly adjusting our expected cash flows from operations to be in the range between $700 million and $800 million in 2012. Our strength in cash flow generation should provide the flexibility to invest in the business for sustainable growth, to support our newly authorized share repurchase program, and to repay debt to achieve our targeted debt to EBITDA ratio of 2 to 2.5 times in 2013.

Repayment of debt remains an important use of our strong operating cash flow. However, as announced today, our Board of Directors has authorized a new share repurchase program to repurchase up to $450 million of our Common Stock through March 2015. This new authorization replaces the $750 million stock repurchase program approved in 2008. As of June 30 there was approximately $175 million remaining under the 2008 authorization. The new authorization will increase our future flexibility to allocate capital toward the repurchase of shares, and at current prices, we expect to be more active in that regard. While somewhat difficult to predict with precision, for our full year EPS financial guidance, we believe that diluted weighted average shares outstanding of approximately 121 million shares would be a reasonable share count estimate for 2012. For additional details on our 2012 financial results and guidance, please review today's earnings press release.

Finally, I'm excited to announce that Endo will be hosting its first investor Analyst Day. We ask you all to hold October 4, 2012 for a meeting in New York City. Invitations will be provided at a later date. During the Analyst Day, we expect to provide 2013 financial guidance and a perspective around longer term financial performance for 2014 and 2015 reflecting the continued evolution of our business. We expect to provide detail regarding our drivers for top line growth and continued efficiency improvements in our expense base. This concludes my prepared remarks. Now, I'll turn the call over to Blaine. Blaine?

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

(Operator Instructions)

Marc Goodman.

Yes, a few things. One, on revenues. Can you talk about OPANA ER tamper resistant a little bit more? How much or what were revenues as far as that versus the older version, so we can get a sense of that. Second, the 20-milligram is what we've been focused on for the past three, four, five weeks, and it doesn't seem to be moving that much, and I thought that was the leading indicator of the business coming back, so if you can talk about that a little. Second on SG&A, you mentioned accelerating synergies and cutting discretionary spending. Discretionary spending seems pretty easy, but how do you accelerate the synergies, what are you talking about there? And on gross margin, given the first two quarters, I would have thought you'd be raising the gross margin assumption a little bit, so I was curious why not for the second half of the year.

I'll take the first part of your question, Marc. In terms of where we are with OPANA ER, one of the things that we're very excited about is that we have been able to accelerate the conversion of the market to the new crush resistant formulation. And as I mentioned, we have about 90% of prescription volume now being filled with the new crush resistant formulation. And the conversion of the market is about six months ahead of our original timeline, so we feel very confident that with this conversion now complete that we can return the franchise to growth. I think in terms of the looking at the TRF trends by dosage level, it's still a little early to predict how this franchise is going to rebound.

We had, as you know, a inventory shortage/outage as a result of the Novartis plant shut down in the first quarter, and despite our best efforts, we did in fact have some retail level inventory stock outages in the first quarter, which led to some of our patients being switched to new products. With that said, our customers are indicating to us that 93% of those physicians who have previously written OPANA ER intend to come back to the franchise and switch patients back, but in a class where that patient switching dynamic tends to happen on about a 90 day cycle, I think it's just a little early to see a complete rebound in prescription volume yet. We do expect though by September of this year we'll be back to sequential growth in demand.

And with regard to your question on SG&A and synergies, some of that synergy acceleration will come from a reduction in duplicative support services as we continue to integrate AMS into the broader Endo. We're pretty excited about the manufacturing synergies that we're seeing from our Qualitest organization. That's been a great transaction for us, and when we first acquired the company we talked about $30 million of peak year synergies in 2013. Here we are a year ahead of that and we're already north of $50 million in synergies from manufacturing efficiencies. On the gross margin side, I don't dismiss the possibility of further improvement in gross margin as the year continues to unfold. We expect continued good performance in our branded pharmaceuticals business, continued strong performance in the generics business, and growth in our AMS franchise, and all of those would be up drivers for gross margin over the remainder of the year.

Thanks, Marc. Next question, please?

Ken Cacciatore, Cowen & Co.

Hi, Alan. I just want to just clarify a little bit of your comments on the spending, again following up on what Marc is saying, it seems like really aggressive sequential declines. Could you just get a little bit more specific on where that's coming from and then on LIDODERM we see there were two other filings in the quarter. Can you just discuss, does the interaction continue as you try to work with them about establishing what you believe are the proper guidelines and then I'll have a follow-up after that, thanks.

Sure, so on the spending side, Endo has a robust history of managing its expenses to invest in accordance with its top line priorities. And so what you're really seeing here on the SG&A side is a pullback in some discretionary investments. Having said, that we're really allocating against some of our biggest growth opportunities like OPANA ER where we see that coming.

And I would also add to it that if you look quarter-over-quarter, first quarter to second quarter, we've taken $12 million out. I would also add that with the acquisitions we've made over the last three years, we have in the planning, for the acquisitions, have understood where I think those synergies are. So I don't know that we're seeing anything atypical other than the game plan of going through the integration. And again, looking at the strategy, which is as I said, focused in the pain and the urology sector. So I think when you're focused like that, I think you can get the synergies as Alan talked about.

And with regard to LIDODERM, I guess I'd want to say out front that while we're not, while we do believe that there are high hurdles to a generic coming to market for LIDODERM, in the event we do see a generic, we are ready, and we can dial down on our expense base accordingly. We remain very confident that the regulatory hurdles are very significant for Watson or others to come to market and just the fact that we've seen 34 months since Watson has filed and the FDA has not ruled tells us that they are taking our Citizen's Petitions very seriously.

Thanks and Julie just following up on your comments about stocking, can you just give us a sense, are we all done here in terms of the pharmacies that were having issues stocking the new products, maybe the success of your new pharmacy reps, just a little bit more specificity there. Thanks.

Yes, sure. So we have basically, in terms of all of the pharmacies that purchased OPANA ER in 2011, we have successfully restocked 80% of those pharmacies, but in addition to that, we have added 4,700 new pharmacies that never stocked the product before, which more than compensates for the 20% who haven't yet stocked the new formulation. Now, we're not satisfied with that. We're reaching out to each and every one of those pharmacies that haven't yet reordered with the intention of getting them to restock the product. But right now stocking is not an issue with respect to OPANA ER and we're really focused now on demand generation activity.

Thank you.

By the way, Ken, just to come back to LIDODERM for a moment. I really do think that the market under appreciates the extent to which we would retain franchise economics in the event of a loss of exclusivity on LIDODERM. We believe that we could retain at least 50% of the volume on that sale. We would earn a 25% royalty on Watson sales of a generic and I think that that is meaningfully undervalued in current views of the Company.

Thanks, Ken. Next question, please?

Shibani Malhotra, RBC Capital.

Thank you very much. So just a couple of questions. First, on OPANA, Julie you said you expect the share, or the performance to start improving in September, but can you just comment on your basis for that? Specifically, I guess we're asking how much of the negative prescription trend is based on things that can be managed and turned around, versus abusers potentially moving to other products? And then secondly, and this is I guess a question for everyone. On your strategic options in the Company as a whole, clearly the shares or the stock hasn't been reflecting the value of Endo, at least as we see it, but just wanted to get a better understanding of how Management sees the options available, should the shares continue not to reflect the true value of Endo going forward. Thank you.

Yes, this is Dave Holveck, and let me, Shibani, talk first about maybe the overriding message is one, we have I think done an extraordinary job relative to industry standards in terms of the conversion. And the fact that we went from almost a full stop to a convert, which is now completed, and certainly as Julie indicated, the changeover having the stocking, the additional elements in the trade now either on board or new that have come on board. And I think the other element is the elements relative to the environment where I think the use, misuse, appropriate use if you would of opioids is in the forefront, and I do think that's another positive trend. Notwithstanding, again, some of the elements that have to be put into place just to move forward. On the patient level, again we have the sales team I think, and the elements of promotion in a very good spot so the supplies are there. I think the environment is very receptive, and at the same point, I think we have the sales team and clinical support that can move this forward. Now I'll let Julie take a little bit more of the granular cuts, but when you look at overall elements of where this business is and where its come from in the last eight weeks, I think we're ahead of industry standards.

Yes, I would agree with that, Dave. This is in essence a product launch. We came off of a supply disruption event that set us back a little bit, but again, having converted the market now almost entirely within record time, we feel very confident about the long term prospects of the franchise. And just the reason I'm convinced that we'll be back to sequential growth in the late third quarter, early fourth quarter is that we've got our sales force out fully trained and armed with promotional messages that have been approved the FDA with respect to the new formulation. And the fact that it's been designed to be crush resistant, that is a set of key messages that we were not able to provide initially until we got the FDA clearance of our promotional material. So the reps are now armed, they are trained, they are out there communicating and creating demand.

We've also introduced a new co-pay program that we believe is the best-in-class co-pay program and essentially reduces patient out of pocket costs to about $15 per prescription. That is basically what they would pay for a generic in this category, so we feel that it's the extent that there's any economic barriers to reigniting demand we've addressed those. The other thing I would say in terms of, you asked the question around the trends with respect to what we can control and what we can't control. Clearly to the extent that there were people using OPANA ER improperly, we are happy to see them leave our franchise, we believe that makes us stronger over the long term, which is better for growth. And I'd just point to the fact that when we did see patients switch off of OPANA on a temporary basis, we saw them switch pretty equally to working to Morphine Sulfate extended-release and Oxycontin, which as you know, is only available in a tamper resistant formulation. When you look at that combined with the fact that we now have new riders and new pharmacies stocking this product, it tells me that there is tremendous market demand for tamper resistant long acting opioids, so I'm confident we'll be able to get the franchise back to sequential growth.

Can I ask for a clarification, and then if you guys continue with my other question, but two things, one are you expecting further decline before we see growth? And two are you able to estimate what the portion of the franchise were abusers?

What I can tell you is that what we seen over the past four weeks in prescription data is what I believe to be a flattening out of the downward trend, so we're optimistic that we'll be back to sequential growth shortly. I can't estimate to what degree there were misusers or abusers in the franchise, but as I said before, to the extent that we have them in our franchise we're happy they are no longer part of the core base business. We think that we're positioned for long term growth now that we've got this new crush resistant formulation on the market.

Great.

And from the standpoint of strategic options, I think that Endo's current stock price really under values the growth opportunities that we see in the Company and that's a function of how we continue to execute on the Company that we put together. I think second quarter 2012 is very strong in that regard. You're seeing good strong V-Gel sales and revenues rebounding to pre-disruption levels, very strong contribution from the generics business, maintenance of bottom line financial guidance which has attended to a very strong cash flow generation. The implementation of a share repurchase program to support our stock. So all of this tells me that in my view is very indicative of a Management team that is focused on executing on the business that we've built and creating more value.

Great, thank you.

The next question, please?

Greg Gilbert, Merrill Lynch.

Thanks, good morning. I have a few. First for Alan. Can you detail what's behind the change in cash flow guidance for the year? And can you give us any help on potential legal exposure on the mesh related issues? Some other companies have disclosed a number of lawsuits and I think there have been some verdicts et cetera. Can you help us ring fence that issue for Endo?

Sure. So good morning, Greg. I think with respect to the cash flow guidance, I'd remind you that cash flow from operations is a GAAP measure, and so that's affected by some incremental restructuring charges that we now expect in the second half of the year. It is also affected by the timing of some payments to payers on rebates that have been recently adjusted. We are seeing very strong cash flow from operations, about $200 million in this quarter alone. On the mesh side, I think it's early days for all of the mesh-related litigation. Most of our cases were consolidated into an MDL in West Virginia. They are in front of the same judge that saw both the J&J, as well as the Bard cases, and we really expect that any trial activity around that is 2013 and beyond, so it's early to speculate on that.

Have you settled any cases?

We have settled a couple of cases for deminimus amounts.

Julie, on Qualitest, is this quarter's level of sales and gross margin a good level to use for a quarter that excludes major launches, or are there other things that benefited that, or detracted from it this quarter?

Well, no. I think what we're looking at is a more sustained performance level in the second quarter. We spent a lot of our time in the first quarter optimizing our capacity to support sales of our highest gross margin products. We continue to have a lot of pricing flexibility with our current portfolio. As you know, we've got a very diverse portfolio with over 170 product families and 600 SKUs. We've also been successful in getting approval of our -- some of our ANDAs and getting those products very quickly into the market. So it's a combination of factors, but I will tell you, I think that the health of that business is just inherently our ability to continue to meet market demand with production capacity that has been optimized.

And I think it's sustainable over the medium term. We're seeing our growth coming from in line product performance. We're being more judicious in the SKUs that we're selling into the marketplace. We've seen market dynamics that allow us to take price increases. Those were parts of the things that we saw as attractive in the Qualitest acquisition when we first brought it into the fold, and I think that that business is performing better than we ever anticipated.

Yes, and lastly if I could direct this to David. It's not apparent to us that services and devises are helping Endo from a sales or stock price standpoint. It's good to see Management and the Company put money where their mouths are in terms of repurchase of stock. But just wanted to get your latest thinking on your confidence that services and devices are good legs of the stool to have as you look out over the next couple years, thanks.

Oh, I appreciate the question because I do think it gets undervalued. As one looks into the future, and Greg, as you know from the early days of coming on board with Endo, I really believe that we were tooling the Company in order to compete against the -- what we saw as the changes in health, both in not only the standing from the insurance basis, but how it was delivered. I think what we have right now is a very strong franchise that I mentioned with urologists. I think the service business where we have HealthTronics namely being positioned more in the centric from data, and I think data is going to be the currency of the future if we're going to be talking about how drugs are used, devices are used, or more importantly, outcomes are attained. I think our position that we have through the acquisitions give us a greater than 30% and almost 11 million patient records which gives us a lot of strong data to give us guidance, both for the practitioner, as well as for us as planners for the future. When you take about AMS, I mean the considerable aspect that AMS brings is legitimacy in urology, and we have a very strong reputation, and it's a Company that as we bring it into the enterprise, I think both the HealthTronics and AMS now with the new leadership of AMS working with HealthTronics, I think we have a tandem of opportunities that are going to further direct our growth. As well as I think put us in the forefront of a transformative Company that's got to be competitive in the new world.

And I just might add that I think when you think about the AMS business, then clearly there have been some headwinds with respect to procedural growth in the US in particular, and that's a broader sector dynamic. We believe that you look at the dynamics of the underlying demographics of the patients that we treat, the aging patient population, that the demand for these procedures will get back to growth. And in the midterm, we've got a number of exciting things that we're looking forward to, including a number of international launches this year. And I'll just remind you that unlike a lot of other segments of the healthcare industry, devices tend to be very stable in terms of the cash flows, not subject to things like patent clips, solid margins over 80%. So again, we believe that with Camille coming on board and really getting back to reigniting growth on the top line and optimizing the cost base, that this is going to be a key contributor for us going forward.

Thank you.

Next question, please?

Corey Davis, Jefferies.

Thanks very much. First, just to be clear in talking about your expectations for sequential OPANA growth, I think you're referring mostly to volume, but with respect to revenue, the question is how much in this quarter was stocking, and would you expect the revenue to be higher than the $93 million this quarter in Q3 and Q4?

Right, so I think what you're seeing in the second quarter with OPANA is a lot of inventory restocking. I expect that going forward now that we have stabilized inventory trends that what you're going to see is the sequential growth will be driven by demand TRF growth. And I think we've got about $76 million that we're anticipating attributable to demand generation and roughly $18 million in stocking.

And I think the other thing that I would add is what we saw in previous years in OPANA ER is migration of dosage strengths and as patients are restarted on OPANA ER, you typically start at the lower 20-milligram strength, migrate up to the 30 and 40, that's a greater value per script for us and should be an up driver in our revenues as well.

I guess, I would just add, not to take just a short-term view, the long term view is what excites me about OPANA, is we put a patent state against this that takes it out to 2029 and to me, I think to Julie's comments relative to a product launch, I think we have a stronger asset than we've ever had. And I think we're in a marketplace buttressed with the pain franchise and the generics, I think puts us in a very strong long play position, so short-term, again work, yes. Long term, I think the market is there and our position on the patent state gives us legitimacy as a long term standing player.

That leads nicely into my next question which is I assume that you've had a chance to take a look at the recent Purdue Citizen's Petition filing with respect to what it takes -- what they think it takes to get a generic approved and showing tamper equivalence. So, one, do you agree with the basic principles there? And two, are you going to be active on that front? And three, do you expect to see FDA guidance on that by the end of this year as was required in the PDUFA 5 legislation I believe.

Let me give you again, reinforce my last comment, is that we're here to play for the long term. So yes, to your question we do have and will continue to bolster again the elements that support that. And I think again, the positions that we've taken both as a Company and within the industry, and again, within the guidelines that I think society wants us to play in, we're in a leadership position on all aspects. Ivan?

Yes, Corey, it's a great question. Look, clearly the TRF, bioequivalence for TRF raises some particularly taxing, complex, scientific questions that require very careful consideration by the FDA. We believe in using the CP process when we have a strong scientific and regulatory argument to make, and to be clear, in the case of OPANA we believe that we have a strong scientific and regulatory argument to make.

And I'd just say, we've looked at the Purdue Citizen's Petition and we are in strong agreement with the concept that they've raised in that petition. And to Dave's point, you can be assured that we are committed to appropriate responsible use of opioids, and we continue to be active in Washington to try to be part of that solution. So you can expect that those efforts will continue.

Great, thanks, everyone.

Next question, please?

Annabel Samimy, Stifel Nicolaus.

Hi. Thanks for taking my question. Just going back to the inventory stocking, can you give us a sense of how much of the VOLTAREN sales was demand versus the stocking? And then separately, on guidance, you'd mentioned that you brought down guidance related to OPANA, but we did see some tweaking down of the AMS business and the services business. So can you give a little bit of color there what's going on with women's health, is it stabilizing or is it going to continue to decline? And then finally, we obviously saw the share buyback. Can you just talk to us a little bit about business development going forward and where you think you might be looking to invest?

Sure. Well with regard to V-Gel, I think the really important message for this quarter is the pace of the snapback in V-Gel sales. We are at 95% of pre-disruption levels in terms of the sales trajectory, we're seeing very strong sequential growth in script trends, it's a product that has typically performed well. So irrespective of how much is script growth and how much is stocking, at the end of the day, we've got a very vibrant franchise that's back to a very robust growth trajectory. With regard to the AMS business, we do see that providing at the top line a more modest contribution this year, but I think that we're very focused on opportunities to regenerate demand in our women's health and our mens health segments. We've completed our transition in the BPH business that should generate fiber uptick in the US.

And what's not often seen in the AMS statistics is the vibrancy of the international operations. The European operations were up 37% year-over-year in the second quarter, Asia Pacific was up 18% year-over-year in the second quarter. And that international performance is a testament to the diversified model that we believe strongly in, even within AMS itself, I look forward to working with Camille as we look to reignite growth in the franchise. With regard to share repurchase and business development, again this is a Company that will generate between $700 million and $800 million of free cash flow. I don't see any reason why we can't take some of that cash flow to continue to pay down debt and meet our debt to EBITDA targets, take some of that cash flow and purchase stock, and still have the opportunity to pursue external growth opportunities. I think those growth opportunities will be more modest relative to what we've seen in the past. We're very focused on extracting the value from the opportunities we've already put in place.

Thanks, next question, please?

David Amsellem, Piper Jaffray.

Hi, this is Trevor Davis on for David. Just a couple. On the generics business can you give us an idea of how many product approvals you're looking at over the next six to 12 months? Or, I guess you could put it another way, how many of the ANDA filings pending at the FDA are maturing? Or I guess, said another way, at least two years from the filing date? And also what effect on margins for the generics business will the new products bring over the next 6 to 12 months? Thanks.

Yes, I'll be happy to answer that. We are, it's hard to predict with any kind of precision how many ANDAs you can pull through the FDA in any given year, but our expectations are it will be somewhere between seven to nine approvals this year, got about half of those in the bag at this point. And we're working on a number of future filings, but really our focus right now in trying to pull those 50 ANDAs that are currently on the backlog at FDA. So we've been really focused on optimizing the velocity of throughput there.

With respect to the margins of the new products, the way we, as you know in the generics business every single market segment is very dynamic, and as we get an approval, it's not a foregone conclusion that we'll launch that product. We may wait for market conditions that are optimal such that we can optimize our overall contribution margin of that business. So we're constantly looking for the ability to optimize our production capacity against our highest margin products. And as new products get approved, they go into the mix for consideration of sale based on those goals.

You know, I guess I would add the bigger picture on the generics business is really the strong contribution from in line products. It's really the in line product growth that is generating 20% quarter-over-quarter revenue growth for us. It's the in line products that are behind the 139% increase in profitability year-over-year for us. The pipeline opportunities for us are icing on the cake on that. We have a very vibrant growing in line portfolio and we expect that to be the trend going forward.

Thanks, can we go to the next question please?

Mike Faerm, Credit Suisse.

Good morning. Thanks for taking the question. A couple on AMS. On the women's health business, can you just elaborate a little bit on what your expectations are for mesh procedures? You said in the past that you thought first quarter you were seeing the bottom. Do you think we're there yet, and how do you think that unfolds for the second half of the year?

It's hard to predict again. What I do, what I can tell you is that I do think we're adjusting and we are seeing to the point of the stabilization. I do think that in the field, it is recognized that when you get into a prolapse, you do have a couple options, certainly just pure surgical, or the addition of the mesh. I do think again we're finding that the durability continues to be seen from the medical practice that it's best. I think the issue really is that the patients have to be selected appropriately, and I do think again the skill sets to apply the mesh are a critical element. All of that I think is a big part of what we think going forward with the AMS reputation, with the relationship and the skills that we add to the physician, along with the education, I do think we've in a strong position to see that business be a contributor going forward. We also have, and I think this is another area of more to come, a pipeline that looks beyond just mesh relative to how we look at AMS in general, and also relative to the women's health. And again, I think the point of as we look going forward into overall growth for the service and device business, I think we have again the greater synergies as of yet to be realized between AMS and HealthTronics. More to come as we see and show you there, with the diagnostics, with the mobile service providing aspects of it, as well as with the data construct, so net of it all, I think we're just starting to bring that business to the next level.

And my second question was on the BPH business. It's down about 4% year-over-year and about flat sequentially. Can you give us some color on what's holding that back and how you expect growth to progress or not progress over the remainder of the year?

Well I think again you're hitting on a couple areas. On the upside of it, international is really a big contributor to the near term growth. I think the longer term aspects go into a couple areas. One is the access to the market where I do think we've gone through, AMS has gone through a couple of durations of strategy there, but I do think what we now have at our hands is the synergies that I talked between HealthTronics as well as the AMS group. Remember, HealthTronics has 30% of relationships with independent practices. They have a mobile service, I think we haven't brought to bear some of the training elements that that element can contribute to BPH. I also think that again, it's a matter of training, we will be introducing some elements to facilitate training, and again, more of that will be shown in the third and fourth quarter. So again, we're in the point of new Management and the adjustments that I think come with the critical mass that the enterprise can put up against this issue.

I think the quarterly revenues in that piece of the franchise mask where there's some very exciting trends in terms of what we're seeing on fiber utilization and fiber sales. That's the highest margin component on the business. In the international markets we're seeing well north of 20% growth in fibers across-the-board in our direct markets. In the US, we're seeing double digit growth among the direct accounts that AMS has. And we're in the process of completing now a retooling on our go to market strategy in the US, which should set up the remainder of the US market for good fiber growth as the strategy continues to unfold. So we're really quite encouraged by it.

Thank you.

Can we go to the next question? I think we have time, being respectful of everyone's time, for about three more questions.

Chris Schott, JPMorgan.

Great. Thanks very much. First question was just coming back to OPANA. How broad of use are you expecting for the co-pay program and what impact should we think about that on ASPs for the product? Second on OPANA, if you can just update us on your latest positioning of that product relative to Oxycontin. And then finally just coming on the repo and your stock price, you've got fairly attractive debt levels or rates, you've got now a lot more clarity on LIDODERM cash flows, I guess my question was just, with this repo announced, why not allocate most of your cash flow to repo at these levels given it seems that your stock is at a pretty attractive level? Thanks.

So with respect to OPANA, in terms of the co-pay program, basically this is a program that is targeted to commercially covered patients, and essentially reduces their out of pocket. We have exposure, we fully factored in the impact of what we think this co-pay program will mean in terms of sales and that's inherent in the guidance that we're issuing. With respect to our positioning versus Oxycontin, what we really focus on in terms of positioning OPANA ER in the marketplace is the inherent advantages of the compound itself. It's a compound that given its PK profile lends itself to true twice daily dosing, whereas with a lot of other products, including Oxycontin, doses tend to get migrated to three sometimes even greater frequency of doses per day. We also focus on the fact that Oxymorphone is not metabolized by the cytochrome P450 system, unlike other opioids, which can lead to drug-drug interactions. So we're really focused now on selling the clinical features and benefits of OPANA ER, now that it's been fully converted to the new crush resistant formulation we feel even stronger about positioning OPANA ER as an optimal choice for patients who need long acting control of their moderate to severe pain.

And with regard to share repurchase, I don't really think debt pay down versus share repurchases is an either/or scenario. We've got $700 million to $800 million of cash flow from operations. We do believe that at our current stock price the market undervalues the growth opportunities that are implicit in Endo, and our Board would not have taken the action it did to put $450 million of capacity at our disposal if it didn't believe that it was an appropriate investment of our cash.

Thanks, Chris. Go to the next question please?

Gary Nachman, Susquehanna Financial Group.

Hi, good morning. First a clarification on OPANA TRF. Julie, what are the gaps in access that you were talking about, was it just pharmacies or something else? And then in Qualitest, how much of an improvement have you seen in pricing? If you could quantify that and expand on what you're doing to enhance manufacturing capacity.

Sure. With respect to TRF and I'm losing my train of thought on what the question was. Sorry about that.

Gary, what was the first --

No, when you talked about the gaps in access, I'm just curious if that was just at the pharmacy level or if there was something else that could have contributed to that.

Gary, I was really just referring to the pharmacy stocking and again, I think we're in a really good position now. We actually have more pharmacies stocking OPANA ER in the new crush resistant formulation today than we did a year ago and so I don't believe that stocking is -- will be a barrier to patient access any longer. So again, as I mentioned earlier, we're highly focused on demand generation activities at this point.

And actually before you go to Qualitest, any changes in terms of the sales force promotion behind that product given that you've seen a little bit of I guess a change in demand from what you were expecting?

You know, OPANA ER continues to be the most important product in our portfolio relative to our sales force compensation. It is a first position detail for us and we are highly focused on returning the product to sequential growth. And in terms of our messaging, we really haven't changed our inherent messaging in terms of the value of the compound itself. What we're focusing on though is making sure that physicians are aware that it's now available in a new formulation that's designed to be crush resistant. So that's the only shift in our promotional messaging at this point. And again, I'm very delighted with the physician reaction. We've got very favorable initial physician reaction to this new product, and a very strong intent to prescribe, so I'm very encouraged by that.

On the Qualitest, just a point relative to the expanded manufacturing, we think again the critical aspects there are further elements in the automation. I think better processing, I think our automation along within interior works relative to process and training have really been the biggest assets. I think we also can see some of the elements in terms of our growth built around even greater flexibility providing different ways in which we both practice, package, as well as deliver. So elements of our manufacturing I think relative to the footprint of the factory, but also the inner workings, are probably where we get the biggest near term scale. Beyond that I think we just looking at other alternatives as others do.

And I think we're actually quite excited to be making some of these investments in the manufacturing space in Qualitest. You know with 20% plus year-over-year growth last year, 13% to 18% growth that we're guiding for this year, we need more capacity so that we can continue on our revenue trajectory and those are the kind of investments that make an awful lot of sense for us.

Okay, and then Alan just on the pricing? I know it's different by product, but just maybe order of magnitude just to help us how much of an improvement you've been able to get generally speaking. Thanks.

Well, I think the margin improvement, the gross margin improvement, which is a 12 percentage point improvement year-over-year, is very indicative of the kind of benefits that we're able to get on the pricing side. It falls right to the bottom line for us.

Okay, thank you.

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

Greg Waterman, Goldman Sachs.

Thanks for taking the questions. First, a clarification. Are there any share repurchase assumptions built into the 2012 guidance or is your revised diluted share guidance just a function of share price impact on diluted shares? And then on AMS, you mentioned healthy ex-US revenues. Was hoping you could give us the US versus ex-US split and help us think through constant currency growth versus currency impact?

Yes, so first with regard to the share purchase assumptions, there are no share purchase assumptions built into our guidance. We expect to meet our guidance on purely operational trends and considerations. Blaine will give you a better sense offline on the US versus ex-US split. I don't have that handy at the moment. But what I can tell you is that the international side of our business is typically about 30% of our overall revenues and FX had no appreciable impact on the top line.

Thank you.

Great. Well with that, I'd just like to close the call. Thanks everyone for joining us today. Jonathan Neely and myself will be available this afternoon for any follow-up questions people have. Thanks for joining us today. We appreciate it.

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