Endo International PLC (ENDP) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Paladin Labs third quarter 2013 results conference call. Paladin released its third quarter 2013 results today at 6.30 AM Eastern Time. If you did not receive a copy of the release, please visit the Company's website at www.PaladinLabs.com where the release may be accessed. Before turning the call over to Mr. Mark Beaudet, Interim President and CEO of Paladin Labs, listeners are reminded a portion of today's discussion may by their nature necessarily involve risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements.

The Company considers the assumptions on which these forward-looking statements are based to be reasonable at a time they were prepared, but cautions that these assumptions regarding the future events many of which are beyond control of the Company and its subsidiaries may ultimately prove to be incorrect. Factors and risks which could cause actual results to differ materially from the current expectations are discussed in the Annual Report, as well as in the Company's annual information form for the year ended December 31, 2012. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or except as required by law.

For additional information on risks and uncertainties related to these forward-looking statements, investors should consult the Company's ongoing quarterly filings, Annual Report, annual information form and other filings found on SEDAR at www.SEDAR.com. I would like to remind everyone this call is being recorded. I would now like to turn the meeting over to Mr. Mark Beaudet, Interim President, Chief Executive Officer. Please go right ahead, Mr. Beaudet.

Thank you, operator. Good morning, and welcome to Paladin Labs third quarter 2013 results conference call. I am joined today by our CFO, Samira Sakhia, our Executive Vice President, Business and Corporate Development, Mark Nawacki, our Vice President of International operations, Frank Desrosiers, and the Chairman of Paladin's Board of Directors, Jonathan Goodman.

On today's call we will review our financial results and key developments for the quarter, and we will then welcome questions. I want to remind listeners that throughout the discussion of our financial results, I will be referring to Paladin's adjusted results. The term adjusted, refers to the proportionate consolidation of the financial results of our two affiliate companies, Litha and Paladin Mexico. Given that Litha and Paladin Mexico are being accounted for on a consolidated basis, the consolidated results include amounts attributable to minority shareholders. Consequently, I will be including a discussion of Paladin's adjusted results to highlight Paladin's economic interest in these two companies.

Adjusted revenues increased CAD5.7 million or 11% to a record CAD56.4 million for the third quarter of 2013, from CAD50.7 million for the same quarter -- for the same period last year. Within these results, base Paladin revenues increased by CAD4.4 million or 12% compared to the same quarter a year ago, mostly due to the acquisition of Binotal which contributed CAD3.2 million in the quarter. Furthermore, Paladin's promoted products, including Tridural, Trelstar, Testim, Abstral, Digifab, Glucagen, Oralair, Silenor, and Pollinex-R combined, increased by 11% for the quarter compared to the same period last year. Litha's adjusted revenues increased by CAD1.3 million or 10%, mainly due to the additional investment of Paladin in Litha, increasing Paladin's proportionate share of Litha's revenues from 44.5% to an average of 49.5% during the quarter ended September 30, 2013. As at the end of Q3 2013, Paladin held a 61.53% interest in Litha.

On a consolidated basis, revenues for the third quarter were a record CAD71 million, an increase of over 6% over the same period last year. The increase is mostly attributable to the acquisition of Binotal, and the sales growth of Paladin's promoted products. Litha's revenues decreased by CAD0.3 million or 1% for the quarter ended September 30, 2013, compared to the same period last year. Adjusted EBITDA for the quarter -- for the quarter ended September 30, 2013 increased 15% to a record CAD24 million, compared to CAD20.9 million for the same period in 2012. Within these results, base Paladin EBITDA increased by CAD3.2 million or 16%, primarily due to the acquisition of Binotal and the growth of promoted products, offset by increased costs associated with the launch of new products.

Litha's adjusted EBITDA decreased by CAD0.1 million or 3% for the quarter ended September 30, 2013, compared to the same period last year. On a fully consolidated basis, EBITDA for the third quarter of 2013 increased by 12% to a record CAD25.4 million, compared to CAD22.7 million for the same period in 2012. The growth in Paladin's EBITDA was offset by a decrease in Litha's consolidated EBITDA of CAD0.4 million or 13% in the third quarter of 2013, when compared to the same period last year. The decrease in Litha's consolidated EBITDA is explained by lower gross income margins as a result of the mix of products sold in the quarter, and by the impact of the continued decline in the South African rand.

Before going further, I want to take the opportunity to discuss the financial results of Litha in its functional currency, the South African rand. It is important to note that the average exchange rate for the South African rand versus the Canadian dollar declined by an additional 4% in Q3 2013, when compared to Q2 2013, and by 14% in Q3 2013 when compared to the same quarter a year ago. In Q3, Litha's consolidated revenues increased by ZAR25.5 million and or by 11% compared to the same quarter a year ago. The increase is mainly attributed to the increase in sales in Litha's medical division, offset by a decrease in sales in Litha's biotech division. The sales in biotech and the medical divisions directly correlate with the award and the timing of tenders by the government of South Africa.

Sales in Litha Pharma were relatively constant in Q3 2013, when compared to the same period last year. Litha's consolidated third quarter EBITDA decreased by ZAR0.3 million or by 1% versus the prior quarter. The decrease in EBITDA is mainly attributed to the lower gross income margins as a result of the mix of products sold in the quarter. In addition, with the continued depreciation of the rand, management of foreign exchange risk remains a challenge, as the purchase cost of inventory is denominated mainly in US dollars, euros and British pounds. Returning to Paladin's consolidated results, net income attributable to shareholders of Paladin for the third quarter was CAD13.6 million or CAD0.64 per fully diluted share, compared to net income of CAD24.9 million or CAD1.19 per fully diluted share for the same quarter in 2012. As at September 30, 2013, we continue to have a strong balance sheet, with net cash, cash equivalents and investments in marketable securities of CAD230.7 million.

So during the third quarter of 2013, Paladin advanced its product portfolio and pipeline. Paladin advanced its OTC portfolio with the launch of Emtrix, a new OTC product indicated for the treatment of onychomycosis or nail fungus infections. Emtrix is a convenient option for patients, as it does not require a prescription, is not associated with significant side effects, and is not contraindicated with any other medications. Furthermore, Paladin expanded its product pipeline with the in-licensing of Urocidin, Bioniche's novel Phase III compound under development for the treatment of bladder cancer. Paladin entered an exclusive license to market and sell the product in Canada, South Africa, and Mexico.

During the quarter, Paladin also closed the strategic agreement with Bioniche that was announced on June 5, 2013. Under the terms of the agreement, Paladin made an equity investment of CAD0.5 million and issued a further $8 million in secured debt to Bioniche, increasing the total debt outstanding to Bioniche to $30 million. The loan bears an interest rate of 13.25% and will mature on July 1, 2014. Paladin amended its existing loan agreement with Nuvo, and issued a second tranche of CAD4 million, bearing an interest rate of 15%. The amendment provides for a third CAD4 million tranche which may be drawn upon achieving certain conditions, the issuance of up to 100,000 warrants to acquire Nuvo common shares, and the rights to in-license WF10, Nuvo's immune-modulating drug candidate if certain conditions are met.

During the quarter, Paladin also acquired Allon, a clinical stage biotechnology company focused on developing and commercializing central nervous system therapies. Allon has developed prototype compounds and expertise in drug development, and will continue the development of these compounds consistent with its goal of bringing innovative central nervous system therapies to market. So subsequent to the third quarter, we announced that the FDA has notified Paladin that it is extending the Prescription Drug User Fee Act goal date for its New Drug Application for Impavido from December 19, 2013 to March 19, 2014. Paladin is seeking FDA approval for Impavido for the treatment of cutaneous, mucosal and visceral leishmaniasis.

The extension is due to the additional time required by the FDA to review supplemental data provided by Paladin regarding chemistry, manufacturing and control details, and other aspects related to the proposed label. It is important to note that the methods for validation of data were not questioned, but rather additional data on validation of important testing points was required, in order to complete the review of the [submission]. We believe that the queries of the FDA were satisfactorily answered, and we do not believe -- and we do not anticipate any impact to the potential approval or the labeling of Impavido beyond the extension of the PDUFA date.

Most significantly, on November 5, 2013, Paladin announced that we have reached a Definitive Agreement to be acquired by Endo Health Solutions, a leading US-based specialty health solutions company in a stock and cash transaction valued at approximately CAD1.7 billion. Pursuant to the acquisition, both Endo and Paladin will be acquired by a new formed -- a newly formed Irish holding company for now referred to as New Endo. Under the terms of the agreement which has been unanimously approved the Boards of both companies, Paladin shareholders will receive 1.6331 shares of new Endo stock and CAD1.16 in cash subject to adjustment, for each Paladin share they own upon closing, pursuant to a plan of arrangement under Canadian law.

In addition, Paladin shareholders will receive 1 share of Knight Therapeutics, a newly formed company that we expect to list on the Toronto Venture Exchange, simultaneous to closing with Endo. Knight will own Impavido, an approved Paladin product with international sales of approximately CAD2.5 million, certain rights associated with that product, and CAD1 million in cash. The transaction values each Paladin share at CAD77, based on the five-day volume weighted average of Endo shares and the five-day average currency exchange rate calculated at the close of market on Friday, November 1.

The transaction is expected to close in the first half of 2014 subject to certain conditions and approvals, including regulatory approvals in the US, Canada and South Africa, the approval of both Company shareholders at special meeting, the approval of the Superior Court of Quebec, the registration and listing of new Endo shares, and other customary closing conditions. Shareholders representing approximately 34% of Paladin's outstanding shares have agreed to vote in favor of the transaction. These shareholders have the right to terminate this voting agreement if Endo's volume-weighted average share price declines more than 24% during an agreed reference period. Paladin will continue to be led by Paladin's current management, will maintain its Montreal headquarters, and will operate in Canada under its current name Paladin Labs Inc.

So finally, I would like to close my remarks by saying that looking back, we have been very proud of our success to date at Paladin. We are also looking forward to the beginning of a new and exciting relationship with Endo. At Paladin, we have accomplished a remarkable journey, for the last 17 consecutive years we have posted record revenue growth in each and every year. In our last five years, we have achieved an average annual growth rate of over 25% per year. Importantly, we have managed to both grow the business and grow it profitably.

Above all, we are proud of our role in bringing new medications to our market that treat disease, and relieve pain and suffering for patients. These results reflect the culmination of our team's strategic choices, and outstanding execution in the deployment of capital and product commercialization. On behalf of our Chairman, Jonathan Goodman and myself, we would like to sincerely thank our Board of Directors, the members of our management team, and all of our employees for their hard work and contribution to the success of the Company to date. We have an outstanding team here at Paladin, and it is a real privilege to come to work each day, and to work with such talented and dedicated people.

We are also proud to bring our proven track record of success into a new relationship with Endo. This marks an exciting moment in the history of Paladin, as our two companies will now work together to continue to expand our business globally. Our organizations share a common vision on how to grow the business, and how to create shareholder value. Our entire team at Paladin looks forward to joining with Endo, and realizing the growth potential in this business moving forward. Ladies and gentlemen, that is the end of my prepared remarks, and we will now turn it over for questions.

Thank you very much.

(Operator Instructions)

And we will proceed with our first question from the line of David Dean with Cormark Securities. Go right ahead.

Good morning, everybody. Thanks for taking the questions, and congratulations on all of the successes over the last 17 years. Can you discuss a little bit about the amendments to the Impavido NDA, beyond what you just said in the prepared remarks?

Thanks, David. Yes. So there is not really much more to add than what we released in our press release, and what I just said which is that the FDA required some additional information in the chemistry and manufacturing section of our submission. We were able to respond to those requests and submitted it. And we were advised that the agency required an additional three months in order to review -- and to review the information that we provided to them.

Okay. Now do you see any of those amendments as having an impact on any of the votes that the panel made?

We don't see that as having -- again, this is chemistry and manufacturing, and we took comfort in the vote that the panel made, which was to recommend the submission for approval.

Okay, okay. That's it for me. Thank you very much.

Thanks, David.

Thank you. And we will go to our next question. It is from the line of Martin Landry with GMP Securities. Go right ahead.

Good morning. If Impavido is approved by the FDA, I believe that you are going to receive a priority review voucher for future or new drug submission. I was wondering, what would be your intention with this voucher? Would you want to use it internally, or sell it to a third party?

Thanks, Martin. The -- so as we announced, the rights to Impavido and also the -- if we are successful in having Impavido approved in the US, and if there was a voucher to be issued, we are spinning off those assets into the newly-formed company, Knight Therapeutics, which will be spun out to the existing Paladin shareholders. So this will be -- this will form an asset that will, at the close of the transaction, will be a separate Company. I think that, at that time the plans for Impavido would be -- or for the voucher would be to see if we can't monetize the value of that voucher, and that is what we are looking to do.

Okay. So monetization of the voucher?

That's right.

Okay. Thank you very much.

Thanks.

And we will proceed with our next question from the line of Philippa Flint from Bloom Burton. Go right ahead.

Thanks, good morning, and congratulations again on all of your accomplishments. I am going to follow-up with more questions on Impavido. Can you -- you mentioned in your original press release that certain other aspects of the proposed label you had submitted amendments to, are those CMC related?

Yes, my understanding is that the questions that were asked of the [dossier] were around the CMC, the chemistry and manufacturing section. And we make reference to the label in the sense that, any discussions about the approval will have an implication for the monograph.

Okay. And also, can you give a rough idea of how profitable the product is? Is it in line with the margins that you report generally?

We don't provide any margins on individual products. So we can't really get into that.

Okay. And finally, (inaudible) will you announce when the reference period is over for the Endo share reference price?

Will we announce when the share --? Well, I think that the details on that will be forthcoming in the circular that we are going to be producing. And so, we will have more information on that shortly.

Okay. And any idea of when that circular will be available?

As soon as we can get it out.

Okay, great. Thanks very much.

Thank you.

And we will go with our next question from the line of Sachin Shaw, Albert Fried & Company.

Hi, good morning. Just a quick question. Wanted to find out in regards to some of the regulatory approvals, have you kind of started that process [certification] Canada, and South Africa, et cetera, and the US as well? And then I have a follow-up as well.

We are working on actively on all aspects of closing the transaction. And it is a big priority for us to get this done in concert with the team at Endo, as quickly -- and as possible.

Okay. But have you made that filing yet? Those filings yet?

Yes, I can't release in detail kind of what has been done, but it's all -- all of the aspects in closing are in progress.

Okay. The follow-up is, the stock has traded more than 50% above the implied CAD77, obviously because of Endo's stock trading, so appreciating. So just wanted to get your thoughts on that. And is there any kind of risk on the tax issue in Ireland for that to pass through? So two parts, just the appreciation, just wanted to get your thoughts on that? And then, the second is on any kind of risk on getting that certification for Ireland?

Well, listen, the stock is trading -- I think that, that reflects the investor's confidence in the strategic merits of the transaction, and the potential of the business moving forward. And I think that's great. In terms of this -- in terms of the specific comments on the tax and any risks there, I don't have any additional information to discuss or to report on that, other than kind of what we looked at and that went into our diligence, in our recommendation to our Board.

Okay, great. Thank you.

Thank you.

And we will proceed with our next question, It is from the line of Alex Arfaei from BMO Capital Markets. Go right ahead.

Good morning, folks, and I will add my congratulations as well. Could you share with us how you are thinking about the value of the priority review voucher? Specifically, I am wondering if you had any preliminary discussions with other potential buyers, and whether those discussions were the reasons this wasn't included in the Endo deal? And my follow-up is that, why haven't more shareholders agreed in favor of the transaction since the deal was announced? Thank you.

So the value of the priority review voucher, obviously, we think that there is value there. But it is an asset that is particularly difficult to value, in that only two have ever been granted in the history of the program, and one has only ever been used, and none has ever been sold. So we do believe that there is value there, and that is why, as a part of the transaction, we felt that it was best to spin it out into a separate company, and leave that in the hands of our shareholders. And how that will work out, time will tell. But like I said, we got into this project, because we thought that there was value there.

In terms of the -- terms of your second question -- in terms of having more shareholders support the deal, the -- we only announced the agreement that we got into with our largest shareholder. And so, it is -- we are not in the process of kind of reporting how many shareholders are supporting the deal. We only asked for -- it was only asked that one shareholder commit to supporting the deal. That was no problem, and that is what we announced.

Okay, thank you.

Thank you.

And we will go with our next question. It is from the line of Fred Greenberg with Greenberg Advisors. Go right ahead. Mr. Greenberg, your line is open for your question. Go right ahead. Please make sure your mute button is not turned on.

I think we lost Fred, Tommy. Why don't we move on to the next question?

Absolutely. And we will go with our next question. It is from the line of Doug Miehm with RBC Capital Markets. Go right ahead.

Thanks, and congratulations as well. I guess my question is, first question is, whose going to run Knight?

We haven't announced that yet, and I think that there will be some more information on that, coming out in the circular when we release it.

Okay. And what about nature of any non-competes that management would have as part of this deal?

Well, as part of this deal, the management team has committed to staying on with the business, and continuing to grow our business moving forward. And so, that is all that I can say about it at this time. The specific details of that are -- I don't think we have any we have released. But I am sure that that will be an element that will be in the circular, and will make for an interesting read.

Okay, excellent. What about -- there is a lot of talk about Impavido, and obviously, the priority review voucher and its value. Why was this excluded from the deal to begin with?

Well, the reason why it was excluded is just because it is a very difficult asset to value. And based on the discussions that we had, we came to the conclusion that our shareholders would be better served if we spun it out, left it in the hands of our shareholders, and see what value that we could realize of it in a separate Company. We are excited at the prospects, and look forward to seeing how this develops.

Perfect. And then, just with respect to the Company itself beyond Impavido, what might the intentions be to build the Company over time?

Thanks, Doug. So hopefully that is the last one, so that we get to some more questions. But the thing that is most rewarding about this agreement is, is that by combining with -- Endo, really like our business, they like what we do. And it is a great fit with what Endo's strategy is moving forward. And so, what in the discussions that we had on the transaction was, they want us to continue build our business moving forward, continue to acquire, grow, launch products, grow internationally. And that is what we are going to continue to do. And it will just be in a new context.

Thanks.

Thanks, Doug.

Thank you very much.

(Operator Instructions)

We do have once again, Mr. Fred Greenberg from Greenberg Advisors. Go right ahead with your question.

Is that Greenberg Advisors?

Yes.

Oh, okay, well congratulations, everyone. I think, I was much younger when I first invested in this Company, as Jonathan knows.

So were we. (Laughter).

Yes, but I am really old now, you are all young still. So -- one of the questions we always discuss was, entering the US market with Paladin skills, or Paladin licensing and et cetera, is that -- it seems like that is completely open now. Obviously, you have to have the right products, was that part of the thinking? I know you talked about international, but international, you are in some small markets, and yet the biggest market is next door. Is that an important part of it, or was it really just a subtext?

Well, I think one of the merits of the transaction, Fred, was that, Endo as a business is a good business, and it has a lot of strengths to it. But it was primarily based in the United States.

Okay.

And for us, we had already communicated a path that we were growing in Canada, and we were growing internationally.

Right.

And when you put the two of them together, you complete the picture. So you have now so -- as a Company, we have presence and access to a large and lucrative US market. And we have a really strong business in Canada. We have access to our platforms in emerging markets, and we have the world ahead of us. And so, we are excited by the combination.

What -- how did you look at the -- when you looked at Endo doing your due diligence, did you get a fairness opinion, by the way? You have a fairness opinion?

Yes, we did.

Who did it?

Who did it? We were working with our advisor, Credit Suisse.

Credit Suisse? Okay. Obviously, they have some pressure on one of their products, Lidoderm. It seems like their earnings will be under pressure next year. Is it on a pro forma basis, because of the lower tax rate that the earnings will not be under pressure? Or -- I am just looking at some earnings estimates in front of me. I assume the decline is due to the Lidoderm patch.

Yes.

Which is a very -- (Inaudible).

Fred, thanks for these questions. I think these are good questions. But it is not, they aren't really about our business. So we certainly looked at the business in our diligence. We made our recommendation to the Board. We got a fairness opinion, and we think we have got a good transaction on our hands. And we are looking forward to moving it forward. So --

So as the documents become public, everyone will have a chance to look at both companies, of course?

That is true.

Okay. All right. Thank you.

Great.

Thank you very much. And Mr. Beaudet, we have no further questions at this time. I will turn the call back to you for any closing remarks.

Great. Well, listen, thank you, everybody for attending our third quarter conference call, and have a great day.

Thank you very much. And ladies and gentlemen, this concludes the call for today. We thank you for your participation, and we ask you to disconnect your lines. Have a great day, everyone.