ENDO INTERNATIONAL PLC (ENDP) Earnings Report: Q1 2016 ... · Welcome to the Q1 2016 Endo...
Transcript of ENDO INTERNATIONAL PLC (ENDP) Earnings Report: Q1 2016 ... · Welcome to the Q1 2016 Endo...
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
©2014TheStreet,Inc.Al l R ightsReserved Page1of27
ENDOINTERNATIONALPLC(ENDP)EarningsReport:Q12016ConferenceCallTranscriptThefollowingENDOINTERNATIONALPLCconferencecalltookplaceonMay5,2016,04:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
KeriMattox;Endo;InvestorRelationsRajivDeSilva;Endo;President&CEOPaulCampanelli;Endo;President,ParPharmaceuticalSukyUpadhyay;Endo;CFO
OtherPart icipants
RandallStanicky;RBCCapitalMarkets;AnalystJasonGerberry;LeerinkPartners;AnalystDavidAmsellem;PiperJaffray&Co.;AnalystChrisSchott;JPMorgan;AnalystGregFraser;DeutscheBank;AnalystLiavAbraham;Citigroup;AnalystMarcGoodman;UBS;AnalystAnnabelSamimy;StifelNicolaus;AnalystLouiseChen;GuggenheimSecurities;AnalystAndrewFinkelstein;SusquehannaFinancialGroup;AnalystDouglasTsao;BarclaysCapital;AnalystKenCacciatore;CowenandCompany;AnalystIrinaKoffler;MizuhoSecurities;AnalystDavidRisinger;MorganStanley;AnalystDanielSanchez;RaymondJames;AnalystRohitVanjani;Oppenheimer&Co.;AnalystKevinKedra;Gabelli&Company;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheQ12016EndoInternationalPLCearningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferencecallisbeingrecorded.
Iwouldnowliketoturnthecallconferenceovertoyourhost,KeriMattox,SeniorVicePresidentofInvestorRelationsandCorporateAffairs.Youmaybeginyourconference.
KeriMattox(InvestorRelations):
Goodafternoon.Thankyouforjoiningustodiscussourfirst-quarter2016financialresults.
Withmeontoday'scallareRajivDeSilva,PresidentandCEOofEndo;SukyUpadhyay,ChiefFinancial
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
©2014TheStreet,Inc.Al l R ightsReserved Page2of27
Officer;andPaulCampanelliPresidentofParpharmaceutical.
Wehavepreparedaslidepresentationtoaccompanytoday'swebcast,andthatpresentationispostedonlineintheinvestorsectionatEndo.com.
Iwouldliketoremindyouthatanyforward-lookingstatementsmadebymanagementarecoveredunderthePrivateSecuritiesLitigationReformActof1995andCanadianSecuritiesLitigationAct,andaresubjecttothechanges,risks,anduncertaintiesdescribedintoday'spressreleaseandinourUSandCanadianSecuritiesfilings.
Inaddition,duringthecourseofthiscall,wemayrefertonon-GAAPfinancialmeasuresthatarenotpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesandthatmaybedifferentfromnon-GAAPfinancialmeasuresusedbyothercompanies.
InvestorsareencouragedtoreviewEndo'searncurrentreportonForm8-KfurnishedwiththeSECtodayforEndo'sreasonsforincludingthosenon-GAAPfinancialmeasuresintoday'searningsannouncement.
Thereconciliationofnon-GAAPfinancialmeasurestothemostdirectlycomparableGAAPfinancialmeasuresiscontainedinourearningspressreleaseissuedpriortotoday'scall.
Withthat,IwouldnowliketoturnthecallovertoRajiv.
RajivDeSilva(President&CEO):
Thankyou,Keri.Goodafternoon,everyone.Thankyouforjoiningusfortoday'scall.IhopethatyouhaveallhadachancetoreviewtheCompany'searningspressreleasethatweissuedearliertoday.Letmenowturntoourfirst-quarter2016earningspresentation.
Onthenexttwoslides,youwillseeabriefagendaandanoutlineofkeythemesfortoday'scall.Tobegin,Iwillprovideasnapshotofourfirst-quarterfinancialresults,which,despitesomeheadwinds,werelargelyinlinewithourexpectations.However,theseheadwindshavecreatedsubstantialchallengestoovercomeintheremainderoftheyear.Weareprovidingrevisedfull-year2016guidancetodaytoreflectthesechallenges.
Wewillspendsomeadditionaltimediscussingthestateofourbusiness,keydriversforthisrebasing,andouractionplansmovingforward.Specifically,therearethreefactorstocalloutthatwe'lldiscussinmoredetailontoday'scall:deeper-than-expectederosioninthelegacyQualitestbusiness,delaysinFDAactionsrelatedtoour505(b)(2)products,andanearlier-than-expectedgenericentrantforVoltarenGel.
Importantly,wewillalsotalkaboutwhywebelievethatourcoregrowthdriverswillcontinuetoprovideopportunitiestoexecuteagainstourstrategicplanandallowustoreturntoorganicgrowth,improvemargins,anddeleverinthemediumterm.
Beforewebegin,IwouldliketotakethisopportunitytowelcomeourtwonewBoardmembersonbehalfofourBoardandtheCompany.WearedelightedthatDougandToddhaveacceptedourinvitationtojoin.Welookforwardtotheircontributions.
Movingtoslide6,youwillseethatQ1snapshotofreportedsegmentrevenues.Inourbrandedbusiness,wesawsolidcontinuedgrowthforXiaflex,whichperformedwelldespitetheexpectedhistoricaltrendofQ1seasonality.ThisgrowthwasoffsetinpartbyadeclineinVoltarenGelduetothatproduct'slossofexclusivityinMarchandcontinuedpressureonthepainmarket.
Inourgenericssegment,thebasebusinesserosioncontinuedintothefirstquarterandwassignificantlydeeperthanweexpectedatapproximately30%.Thiswasdrivenbycontinuedpricingandcompetitive
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
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pressuresonourcommoditizedandpainproducts.Theerosionwaspartiallyoffsetbystrongperformancefromoursterileinjectablesportfolio,includingVasostrictandtheoverallperformanceofthelegacyParportfolio.Wewillreturntothesethemeswhenwediscussfull-yearguidance.
Theinternationalbusinessperformedasexpectedwithamodestdeclineinreportedrevenues.However,ouremergingmarketsbusinessescontinuedtoshowbothconstantexchangeraterevenuegrowthandunderlyinggrowth,aswellasmarginexpansion.
Onslide7,youwillseeourfirst-quartersegmentrevenues,aswellasreportedandunderlyinggrowth.Nextonslide8,weprovidedourfirst-quarterfinancialresults.
Movingontoslide10,let'stalkaboutthestateofourbusinessandthecontextinwhichweareviewingtheremainderof2016.TobestunderstandwhereEndoisnow,it'simportanttoalsounderstandwherewe'vebeenandwhatwe'vebuilt.
WhenIjoinedtheCompanyin2013,wechartedanewstrategiccourseandoutlinedsomeverycleargoals,asseenhereintheleftcolumn.Overthenextthreeyears,wesetouttoachievethesegoalsandpositionEndoforgrowth.ThatstrategyisstillcoretoEndoandtohowwerunourbusiness;however,whathasbecomeclearisthatthe2016specialtypharmaceuticallandscapeandmarketforcesrequireanevolutionofthatstrategy.
Solet'stalkaboutourpathforward.Ourgoalhasnotchanged;wecontinuetoaspiretobuildaleadingglobalspecialtypharmaceuticalCompany.Whathaschangedrapidlyisthelandscapeandmarketenvironmentwithinwhichweareoperating,particularlyingenerics.
Whatdoesthismeangoingforward?ItmeanswearereshapingthepathforwardforEndo.Wearerebasingexpectationsforthebusiness,andareevolvingourcurrentstrategytomeetchallengesandcapitalizeonopportunities.Ultimately,wearepositioningtheCompanyforlong-termorganicanddiversifiedgrowth,marginimprovement,anddelevering.
SoletmenowturnthecallovertoPaultodiscusskeyfactorsanddriversrelatedtogenerics.Paul?
PaulCampanelli(President,ParPharmaceutical):
Thankyou,Rajiv,andthankstoallofyouforjoiningustoday.Let'sstartwithasnapshotofourQ12016genericsrevenueonslide13.Herewepresentabridgebetweenourpro-formagenericsalesforQ12015,andQ12016underlyingandactualsales.Thevariancesbetweenthesalestotalsresultedfromagreater-than-anticipatederosioninbasebusinessofapproximately30%,drivenparticularlybythelegacyQualitestportfolio.Whileweexpectedbaseerosiontobehigherinthefirstquarterthanthefullyear,theactualerosionwasmuchdeeperacrossourpainportfolioandothercommoditizedproductsthanoriginallyanticipated.
Bycontrast,thelegacyParportfolioisperformingontrackwithinternalexpectations.Oursterileinjectablesproductportfoliocontinueditsstrongperformancewith86%growthoverQ12015.Ournewlaunchesandalternativedosageproductportfolioperformancewasstableandlargelyunchangedyearoveryear.Solet'sdiscussthefactorsthatimpactedtheseQ1resultsandthatwebelievewillshapeourfull-yeargenericsperformance.
Movingtoslide14,therearerapidlychangingmarketconditionsthathaveaffectedboththebroadergenericssectorandPar.First,wehaveseenasteepandrapidpriceerosioncausedbypairconsolidationthathasbeenmoreevenprofoundthananticipated.It'seffecthasexceededwhatmighthavebeenexpectedfromanordinarydownturnintheindustry'straditionalpricingcycle.Theimpacthasbeenparticularlyacuteinthemorecommodity-likeproductcategories,suchasourpainandcontrol
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
©2014TheStreet,Inc.Al l R ightsReserved Page4of27
substancesportfolioandourimmediate-releasesolidoraldosageforms.
Second,coupledwiththisconsolidationandnewpayerenvironment,competitorsaretakingaggressivepricingactionstogainmarketshare.Examplesincludeboththe300and325milligramsstrengthofhydrocodoneAPAP,butalbital,morphinesulfate,andoxycodone.
Third,there'sbeenarapiderosionofthepainsegmentdrivenbythreethings:one,continuedmarketcontraction;two,increasedcompetitivecapacityandpressure;andthree,whilestilltooearlytojudgethefullimpact,webelievetherecentlyissuedCDCguidelineswillcontinuetoputpressureonanalreadysoftpainmarket.Asyoumayknow,approximately40%ofthelegacyQualitestportfoliowascomprisedofpainproducts.Sothissector-specificweaknesshashadadisproportionateeffectonourgenericsbusiness.
Fourth,there'sbeenarecentandmarkedaccelerationofFDAapprovalforgenericproducts.Whilewe'llultimatelyexpectthistoalsobenefittheParportfolioandourownpendingsubmissionsovertime,theapprovalsandlaunchesseeninlateQ1andinAprilofthisyearhaveresultedingreatercompetitivepressureforourproducts.
Fifthandfinally,delaysinexpectedFDAactionsrelatedtoour505(b)(2)productsmeansthatwehaveyettoseetheanticipatedremovalofanapprovedcompetitiveproductsfromthemarket.Correspondingly,wehaveyettoachievethemarketexclusivitythatweexpectedfortheseproducts.It'simportanttonotethatwestillexpecttheseFDAactionsbutnowonadelayedtimeline.Theremovalofrelevantunapprovedproductsmaynotoccurbeforefirsthalfof2017versusouroriginalexpectationofearly2016.
Nowthatwe'vetalkedaboutwhathashappenedinthegenericsmarket,let'salsotakeafewminutestoreviewwhensomeoftheseeventssurfaced,therebyimpactingourgenericbusiness.In2016,it'simportanttonotethattheUSgenericlandscapehascontinuedtoshiftwithsignificanteventsandupdatesasrecentlyaslateMarchandApril.Infact,itwasnotuntillateMarchthatweconfirmedthedelaysonregulatoryactionsrelatedtoour505(b)(2)productsthatIjustmentioned.
TheninAprilalone,wehaveseenatleastfivecompetitiveproductapprovalsandadditionalmarketentrants.Finally,we'vealsojustcompletedourconsortiumbidcycle,withamorenegativeoutputandanincreasedpricingpressurethanweanticipated.
Movingtoslide16,IdowanttotakeafewmomentstodiscussourongoingintegrationoftheQualitestandParbusinesses.LastfallinQ1ofthisyear,wewereconductinganintegrationoftwocomplexgenericbusinesses.WhatbecameverycleartothoseofuswhohavebeeninthegenericindustryforsometimeisthatthelegacyParoperatingmodelisbetterpositionedtoaddressthechallengesoftoday'sevolvingmarket.
Asaresult,wesetouttoshiftthelegacyQualitestportfoliostrategyfromahighvolumeapproachtothehigh-valueoperatingmodellongpracticedbylegacyPar.
Aspartoftheintegrationactivities,we'realsotransitioningthelegacyQualitestsystemsandprocessestotheParbusinessplatform.ThelegacyParsystemsoffermorereal-timeandproduct-leveldata,allowingforfasteranalysisandreactionwithinachallengingandchangingmarket.WhilemanyoftheseimprovementswerealreadyplannedatQualitest,theintegrationofourbusinesswillacceleratethebenefits.
Nextonslide17,let'stalkaboutwhatwearedoingtoaddressthesechallengesandbestpositionourgenericbusinessmovingforward,ouractionplans.First,wearecontinuingtomaximizeourkeygrowthdrivers,suchasoursterileinjectablesportfolioledbyVasostrict,andapproximately30newproductsthatweexpecttolaunchthisyear.
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
©2014TheStreet,Inc.Al l R ightsReserved Page5of27
Next,ourplatformforlong-termorganicgrowthisourR&Dpipeline.Wearecontinuingtoadvancethesemorethan250projectspostreprioritizationandanticipatefiling20to30newsubmissionsin2016alone.Wealsoacceleratingtheimplementationofanoptimizationandrestructuringofourproductportfolioandmanufacturingfacilitynetwork.I'lltalkmoreaboutthisrestructuringshortly.
Additionally,weareacceleratingthemoveoflegacyQualitestbusinessontotheParplatform.Thisisalreadysubstantiallycomplete,asourcommercialinsightandforecastingcapabilitieshavebeenfullytransitioned.
Finally,criticaltoouractionplanisourabilitytoexecute.ThisisnotthefirstturbulentmarketenvironmentthattheParteamhassuccessfullynavigated.Ourteamisseasoned,capable,andproven.
Movingtoslide18,nowpermitmetoprovidesomeadditionaldetailontherestructuringImentionedearlier.Mostimportantly,thisrestructuringisanaccelerationofourongoingintegrationandbroaderoptimizationeffortsdesignedtoprioritizeandgrowhigh-valuedurableassets.Itisentirelyconsistentwithallourintegrationactivitiestodate.
TherestructuringwillaffectourmanufacturingsitesinCharlotteandinHuntsville,andwillresultinmorethan60productdiscontinuations.Inaddition,wearepruninglessvalue-drivenR&Dprojectssothatwecanprioritizeourinvestmentsondifferentiatedandhigh-valueproducts.
Weexpectthattherestructuringwillbecompletedbythethirdquarterof2017,andwillresultinatotalofapproximately$60millioninannualizednetrun-ratesavingsbyQ4of2017.Weexpecttoseeabout$10millionofthatgrossmarginimprovementthisyear.
Asaresult,shortly,wewillbegintheprocessofinformingemployeesaboutthesechanges.Aspartofthateffort,approximately740employeeswillbeimpactedunderaphasedtransition.ForEndo,theParmanagementteam,andformepersonally,thisisbothanextremelyanddisappointingtoourCompany.
Wevalueourpeople,andforthosewhowillbeaffected,wethankyouallforwhatyou'vecontributedtoEndo.Wewillbeprovidingresourcestohelpmanagethroughthisdifficulttransition.Andwhilechangeisnevereasy,itisnecessarytobetterpositionourgenericsdivisiontosuccessfullycompeteintheUSgenericsmarket.
Soonslide19,let'stalkaboutourfull-yearrevenueoutlookforthegenericssegment.Wehavepreviouslyexpectedamid-teensunderlyinggrowthrateforthebusiness.Giventheerosionnowforecastedacrossthesector,andparticularlyforourbasebusinessinthedelayandregulatoryactionrelatedtoour505(b)(2)products,offsetbythestronggrowthprojectedforoursterileinjectablesandnewlaunchesandalternativedosageportfolios,wenowexpectunderlyinggrowthforourgenericsbusinesstobeinthelowsingle-digitpercentagerange.
Wedoexpectthaterosionofourbasebusinesstomoderatebacktoratestypicalforthegenericindustrybeyond2016.Theerosionin2016isexpectedtobemoreacutethanhistoricaltrends,duetoourrelativepricingandsharelevelsinthepainmarketspriortotheobservedandexpectederosion.
Movingtoslide20,youwillseealookatourQ12016reportedgenericnetsalesannualizedversusourfull-year2016guidancemidpoint.Youcanseetheprojecteddeclineduetonon-basebusinesscompetitiveentriesandbaseerosion,whichweexpecttobeapproximatelyfiveyearsperquarterthroughtheendoftheyear.Ournewproductlaunchesareasignificantdriverofgrowth,asillustratedbythegreenblock,andbringyoutoourprojectedgenericnetsalesmidpointfortheyear.
Nowlet'slookatour2016launchesonslide21.Weareontracktolaunchnearly30newproductsthisyear;fourofthesearefirsttofileproductsincludingourgenericsSeroquelandgenericZetiaproducts
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
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thatwilllaunchinthefourthquarterof2016.Another2launchproductsarealternativedosages,andanother9aresterileinjectables.Importantly,andasanillustrationofourvalue-focusedstrategyandplatform,nearlyone-thirdofourprojectedlaunchesareproductsthatwillbeexclusiveorfaceonlyonegenericcompetitor.
Finally,let'sclosethisgenericsdiscussionwithaquickreviewofourrobustR&Dpipelineonslide22.AsImentionedearlier,wehavemorethan250projectsinourreprioritizedR&Dpipeline.Weanticipatelaunchingmorethan100ofthembetween2016and2019,representingatotalcurrentmarketvalueofnearly$30billion.
Ourpipelineisrobust,diversified,andpopulatedbyhigherbarriertoentryandhigher-margingenericproducts.Webelievethatpositionsusstronglyforfuturegrowth.IamconfidentinourplatformandIbelievethatourpipelineistrulydifferentiated.Iknowthatourteamhastheexperienceandtheabilitytoaddressthesechallengesandtodeliverfuturegenericsgrowthandmarginexpansion.
Withthat,letmeturnthecallbackovertoRajivforadiscussiononourbrandedbusiness.Rajiv?
RajivDeSilva(President&CEO):
Thankyou,Paul.
LetmenowtakeafewminutestodiscussourUSbrandedbusiness.BeforeIstart,IwouldliketoacknowledgethecontributionsofBrianLortie,President,US-BrandedPharmaceuticals,whowillbeleavingustopursueotheropportunities.BrianhasbeenacriticalpartoftheeffortstorepositionourCompanyoverthelastthreeyears.WewillmisshimatEndoandwishhimwellinhisfutureendeavors.
Movingtoslide24,let'stalkaboutfactorsaffectingourUSbrandedbusiness.First,therehasbeenarecentgenericentrantforourVoltarenGelproduct.Thisgenericcameintothemarketearlierthanweexpected,andithasaffectedour2016outlookfor(inaudible).
Second,wehaveseenincreasingpressureonourbrandedpainsegment.Thisincludesadditionalcompetitiveentries,aswellasacontinuallyincreasingnumberofpublicpolicyandregulatoryactions,suchastherecentCDCguidelinesaroundopioidprescribinganduse.Additionally,therearereimbursementrestrictionsnowinplaceforLidoderm,furtherlimitingtheuseofthatbrandedproduct.
Againstthisbackdrop,wedocontinuetoseesignificantgrowthpotentialinourdifferentiatedproductBELBUCA.However,ithasprogressedataslowerpacethanweinitiallyexpected,duetopainmarketpressures.Thatsaid,wecontinuetobelieveinthefutureofthisproduct,asascheduleIIIalternativeintheopioidcategory.
Onslide25,youwillseetheopportunityforBELBUCA,thefirstandonlyBuprenorphinebuccalfilmforchronicpainmanagement,whichwelaunchedinlateFebruarythisyear.Thereareabout90milliontotalprescriptionswrittenforthetreatmentofchronicpainbelow160milligramsmorphinesulfateequivalents,orMSEs.
BELBUCAiswell-positionedtosourcepatients,bothfromshort-actingopioidsaswellasotherlong-actingopioids.Giventhesizeofboththesesegments,evenwiththerelativelysmallshareoftheavailableprescriptionbase,BELBUCAcouldbecomeaverymeaningfulproductinthiscategory.Itisalsoimportanttonotethatevenintheseearlydays,BELBUCAisnotonlycapturingswitchesfromLAOs,butalsofromSAOsandnewtherapystarts.Further,wehaveseenanincreasingnumberofrepeatprescriptionsweekoverweek.Itsdifferentiatedprofileisresonatingwellwithphysiciansandpatientsacrossthespectrum,andourearlyfeedbackonaccess,ease-of-use,efficacyandside-effectprofilehaveallbeenpositive.
Alongtheselines,let'slookatslide26totalkmoreaboutearlyprogressontheBELBUCAlaunch.There
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
©2014TheStreet,Inc.Al l R ightsReserved Page7of27
arethreeareasthatwehavefocusedonintermsofearlylaunchtractionandfeedback.WhileIwon'ttalkthrougheachbullethere,wedidwanttoprovideacomprehensivelookatwherewearemakingprogressandwhereweseeopportunitiestofurtheraccelerateBELBUCAlaunchtraction.
Next,onslide27,let'stalkaboutXiaflex.Xiaflexcontinuesitsdouble-digitdemandgrowthprofile,andwearemakinggoodprogressingrowingthatbusiness.Weseeasignificantopportunitytoexpandbothourshareofthecurrenttreatmentmarket,aswellasthesizeoftheoverallmarketsforbothDupytren'scontractureanPyronie'sdisease.
AcrossbothoftheDCandPDindications,wehavenewinitiativesfocusedondrivinggrowth.Weareworkingtobroadenouractiveinjectorbaseandhaveimprovedtargetingtoreachthemostappropriatephysicians.
OurDTCandprintadcampaigneffortsarealsoshowingsignsofrealtraction.Forexample,visitorstotheAskabouttheCurvewebsitespendabout10timeslongeronthesitethananaveragewebsitevisit.Andabout1in10visitorsclickthroughtofindaPyronie'sdiseasespecialistintheirarea.
Wehavealsoworkedtoimproveconvenienceofphysiciansthroughourreimbursementsupportinitiativesandourproductsavingsprogram.Overall,theseeffortspositionXiaflexforstrong,continuedgrowth.Weexpectmidtohighteenspercentagegrowthin2016.
Movingtoslide28,let'stalkabouttheotherdriverforXiaflexgrowthoverthelongterm:ourrobustR&Dpipeline.WeseesignificantopportunityandsubstantialvalueforXiaflexacrossboththerapeuticandaestheticindications,andhavetalkedabouthowtheproductcouldbe$1billionfranchiseforEndobythemid-2020s.Thatopportunityisdrivenbythemorethan12potentialindicationscurrentlyintheR&Dpipelineandthemultipleadditionalprogramsandevenearlierstagesofdevelopment.
Aspartofourevolvedcorporatestrategyandinitiativestoreturntoorganicgrowth,weareacceleratingourR&DprogramsforXiaflexandplantomovefiveprogramsintotheclinicevenearlierthanpreviouslyexpectedin2016.Itisatimeofsignificantopportunityforthesegrowthdriversinourbrandedbusiness.Wehavetakenstepstobestseizethoseopportunitiesandacceleratetheirgrowth,whilealsomanagingthelegacyproductswithinourportfolio.
WiththatletmeturnthecallovertoSukytodiscussourfull-year2016financialguidance.Suky?
SukyUpadhyay(CFO):
Thankyou,Rajiv.Goodafternoon,everyone.
Inanefforttoprovideyouwithmoreclarity,weareprovidingadditionaldetailsonhowthefactorsandmarketconditionsthatPaulandRajivdiscussedwillimpactEndothroughtherestof2016.
Onslide30,wehaveprovidedanoutlineofthekeycomponentsofchangetoourrebasedrevenueguidancethatleadtoan11%reduction.Asyoucansee,thelargestdriverofthechangeisthegreater-than-expectederosioninourgenericsbasebusiness.Asareminder,wedefinebasegenericsasextendedrelease,immediaterelease,andpainandcontrolsubstanceproducts.
Aswiththebrandedbusiness,ourrest-ofyearprojectionsarebasedonbusinessandcommercialassessmentandrecenttrendanalysisataproduct-by-productlevelthatalsotakesintoaccounttheoutcomesofrecentbidcyclesandcompetitiveactions.
Approximately55%ofthedeclineisrelatedtopriceerosionand45%relatestovolumedeclines.Thisisanimportantvariable,aspricedeclinesfalltomarginat100%.Ishouldalsonoteweexpecttorealize
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
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thevalueofdelayed505(b)(2)actionslaterin2017.
Nextonslide31,let'slookatthedriversforthechangesinourprojectedgrossmarginfor2016.Ourpreviousguidancewas63%to65%forthefullyear.Giventheimpactsofkeyeventsandmarketfactors,wenowexpectfull-yeargrossmargintobeintherangeof59%to60%.
Usingthemidpointofthepreviousandrevisedguidancerange,weexpectgrossmarginstodeclineabout17%versuspriorexpectations.Weareprojectingadisproportionatelyhighererosionongrossmarginversusrevenueduetoanumberoffactorsthatyouwillseedetailedhereinthebluecalloutbox.Importantly,wedoexpectrealizedgrossmarginforour505(b)(2)productsin2017,andweexpecttooffsetthe2016under-absorptionthroughrationalizationeffortsinto2017.
Movingtoslide32,wehaveprovidedabridgefromourpreviousEPSexpectationsforthefullyeartoourrevisedguidance.ThereductioninEPSreflecttherevenueandgrossmargindriversthatI'vejustdiscussed.We'vetakenactionstohelpoffsetthedeclinesweareprojecting.
In2016,wearereducingOpExacrossSG&A,whileremainingfocusedonprioritizedinvestmentsagainstgrowthdriversandacceleratingourbrandedR&Dprograms.Andweprojectimprovementinourtaxrate.Lastly,wearetakingactionstoimproveourgrossmarginprofilethroughtheplantrationalizationthatPaulcoveredearlier.
Onslide33,youwillseeour2016financialoutlookbybusinesssegment,includingexpected,reportedandunderlyinggrowthratesandgrossmarginsacrosstheportfolio.
ThebrandedbusinessgrowthratereflectsthelossofexclusivityofVGel.Thegenericsoutlookreflectsthedeclinesinthebasebusinessandthedelayedregulatoryactionsthatwerediscussedearlier.Andinternationalisbroadlyinlinewithpreviousexpectations.
Nextonslide34,wehaveoutlinedourfullrevised2016financialguidance.Fromacadenceperspective,wecontinuetoseerevenuesandEPSweightedtothesecondhalfoftheyear,drivenbythelaunchesfromtheParportfolioandcontinuedgrowthfromXiaflexandBELBUCA.
Wenowexpectapproximately46%ofrevenuesand39%offull-yearEPSinthefirsthalfof2016.ThisimpliesasequentialstepdowninQ2duetoanumberofdrivers,includingthefull-quarterimpactofrecentlylaunchedgenericcompetitorsthatwetalkedaboutearlieronthecall.Inaddition,weexpectaramp-upinspendinginthesecondquarterprimarilyrelatedtoouraccelerationofR&DprogramsandcommercialeffortsinUSbranded.
Wehavetalkedthroughthemovingpartsaroundrevenuesandgrossmargin.Weexpectinterestexpensetocontinuetobeabout$455million.Ourtaxratewillbelowerduetocontinuedprogressaroundplanningstrategies,andduetoalowermixofUS-sourcedincomewhilemaintainingstaticdebtbenefitsandacquiredattributes.Dependingonthenatureandtimingofpotentialdiscreteitems,thecadenceoftaxratethroughtheyearcanbelumpy.Consistentwithpriorcommentary,wedoexpectastepupinourtaxrateinouteryears.Wenowprojectthatratetobeinthehighsingledigits.
Nextonslide35,whilefirst-quartercashflowfromoperationswasnegative,itwasimpactedbyanumberofitemsthatweconsidertobenon-core.Afterconsideringtheseitems,underlyingcashflowfromoperationscontinuestobewellcorrelatedtoadjustednetincome.
Iwillalsonotethatourworkingcapitalmetricsareinlinewithourexpectations.Consistentwithpriorquarter,wehaveprovidedmoredetailsaroundworkingcapitalintheappendixofthispresentation.
Movingtoslide36,itisimportanttonotethatwecontinuetoprojectrobustcashfromoperationspriortolegal-relatedcashcalls.IwillnotethatinearlyQ2,wereceivedthefulltaxrefundthatwepointedto
CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
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earlierintheyear.Ultimately,weexpecttouseremainingcashtopaydownapproximately$250millionto$300millionindebtin2016.
Finally,onslide37,letmeprovideyouwithasnapshotofourliquidityprofile.Thisisimportantbecauseourcashpositionandliquidityratiosremainstrongandwellwithinourcovenants,asdefinedunderourdebtagreements.Wedonotforeseeanychallengeinremainingwellwithinthoselimitsin2016andbeyond.
Weexpectournetdebtleverageratiotoremaininthehigh4timesin2016,withsomefluctuationsbasedonquarterlycadence.Wecontinuetoremaincommittedtodeleveringinto3to4timesrangeovertime.
Insummary,aswerebasedouroutlookforourbusiness,whichisdrivenbythefactorsthatRajivandPaulspoketoearlier,weremaincommittedtodrivingfinancialdiscipline,includingtakingactionstoimprovegrossmargins,investingingrowthdrivers,becomingmoreefficientaroundG&A,continuingtoimproveourunderlyingtaxrate,optimizingourcostofcapital,drivingimprovementsinworkingcapital,andimprovingafter-taxcashflowsfromoperationstoserviceourliabilitiesandforinvestmentsinfuturegrowth.
Withthat,letmeturnthecallbackovertoRajiv.
RajivDeSilva(President&CEO):
Thankyou,Suky.
Nowthatwehavediscussedthemarketfactors,whatwearedoingtoaddressthem,andtheanticipatedimpactonour2016financialexpectations,let'stalkabouthowEndoispositionedfor2016andbeyond.
Onslide39,youwillseethecorporatestrategyaswelaiditoutin2013andtheactionswetooktorebuildthebusinessoverthepastthreeyears.Wehavesuccessfullychangedthestructure,thebusinesses,andthegrowthprofileofEndo.Now,giventheevolvingmarketconditions,itistimeforustocontinuetoevolveourcorporatestrategyandtransformtheCompanyforlong-term,durablegrowth.
Onslide40,letmetalkabouthowwefeelEndoispositionedforgrowth.OuraspirationtobuildaleadingglobalspecialtypharmaceuticalCompanythatimproveslivesandcreatevaluehasnotchanged.Wearemindfulthoughthatweneedtosetappropriatemedium-termgoals,reflectingcurrentmarketconditions.Thishasmeantrebasingofourfinancialguidancefor2016andaresetofourpreviousexpectationsfor2017.
However,ourgoalsareclear:returntoorganicgrowthatlevelsabovemarketaverages,improveoperatingmarginstobegreaterthan40%,anddelevertobetween3to4times.Threecoreareasoffocuswillenablethesegoals:growthinourbrandedbusinessandtheXiaflexpipeline,growthinourgenericsbusinessandpipeline,andtheongoingoptimizationofourexistingbusiness.
Movingtoslide41,therearemanykeygrowthdriversthatstronglypositionourUSbrandedbusinessforlong-termgrowth.Weknowwehavesignificantend-marketgrowthopportunitiesinbothXiaflexandBELBUCA.Wearecontinuingtostructureourteamandourbusinesstoachievethatgrowthpotential,whilealsomanagingourdiversifiedportfoliooflegacyproducts.
WearealsoacceleratingourderiskedinnovativeR&Dpipelinetoadvancethoseprogramsandthetimelinesfortheirpotentialmarketentry.Asweexecutethisyear,wewillbeachievingkeymilestonesacrossourUSbrandedbusinessandwewillkeepyouupdatedregardingourprogress.
Onslide42,let'stalkaboutthedurableportfolioandpipelinewehaveinourUSgenericsbusiness.Wearefocusedondrivinggrowththroughourdifferentiatedhigherbarrier-to-entryproductslikesterile
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injectablesandourrobustpipelineofmorethan250programspostrestructuring.
Wehaveadiversifiedand,importantly,resetbasebusiness,andarobusthighlycompliantmanufacturingnetwork.In2016andbeyond,oursuccesswillbedrivenbyPaulandhisproventeamastheyexecuteontheseopportunities.
Let'ssummarizeonslide43.WehaverebasedourbusinessandbelievethisisthetimeofsignificantopportunityforEndo.Wehaveaclearplantofocusonstrategicpriorities:areturntoorganicgrowth,marginimprovement,andde-levering.
Ourkeyfuturegrowthdriverscontinuetoprovidepromisetodeliveragainstthesestrategicpriorities.Andperhapsmostimportant,Endoisaresilientanorganizationandwe'reallcommittedtoourfuture.Together,wewillexecuteonourevolvedcorporatestrategyandachieveourgoaltodeliverproductsthatimprovepatients'liveswhilecreatingvalueforourshareholders.
Thatconcludesourpreparedremarks.Letmenowturnthecallbackovertocarrytomanageourquestion-and-answerperiod.
KeriMattox(InvestorRelations):
Thankyou,Rajiv.We'dlikenowtoopenthelinestoyourquestions.Intheinterestoftime,ifyoucouldlimityourinitialquestionstoallowustogetinasmanyaspossiblewithinthehour,wewouldappreciateit.
Operator,maywehavethefirstquestionplease?
QUESTIONS&ANSWERS
Operator :
RandallStanicky,RBCCapitalMarkets.
RandallStanicky(Analyst-RBCCapitalMarkets):
RajivormaybeforPaul,canyoujusttalkabouthowmuchofthisimpactingenericsisfromnewcompetitiveentrantsversussomeoftheconsortiumscomingbackandpressingyouonprice?AndthenpartofthatthinkingisastheFDAcontinuestoapprovemoredrugs,isthereariskthatthiscontinues?Isthisjustinpainorisitmorebroadly?Thanks.
RajivDeSilva(President&CEO):
Randall,I'llhavePaulanswerthatquestion.
PaulCampanelli(President,ParPharmaceutical):
Ithinkit'sreallyultimately,it'samix.Whenwelookattheconsortiums,clearlywe'redisappointed.WedidhavesomelossofbusinessacrossthelegacyQualitestbusiness.Sofromthatstandpoint,itwashurtful.IwouldsaythatitwastemperedbysomesuccessesonthesterilesidefromtheParportfolio,sofromthatstandpointitwasapositiveeffect.
WhenwelookatthebalanceintermsofspecificallyinthelegacyQualitestportfolio,wehadchallengesbothinpainandreallythesolidoraldosageimmediatereleaseportfolio.Andwhatwewereseeingwasitwasacombinationofnewcompetitorscomingintothemarketthatwereestablished,aswellasjustfirsttimeplayersaswell.Soitwasacombinationofsomesmallergenericcompetitorsenteringthemarketthatultimatelypushedthepricedown.AndalotoftheseoccurrenceswerecominginthelateMarchand
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Apriltimeframe.
Soinessence,itwasseveralfactorsintermsofcompetition,aswellaslossofbusiness.AndclearlyontheFDAsideintermsofnewcompetitorscominginandnewapprovalsrather,IthinkwiththeGDUFAreallystartingtohit,wearegoingtoseemoreplayersinsomeofthesecommodity-basedproducts.Butatthesametime,wehave150productsattheFDA,soyoushouldalsoassumethatwewillalsogetthepositiveimpactofthequickerapprovals.Soattheendoftheday,wewillgetourfairshareofwins.
RandallStanicky(Analyst-RBCCapitalMarkets):
Paul,onthat,onslide20youcallout,Ithinkit's$415millionofnewlaunchrevenuethatyou'repointingtoonthebackhalf.Howmuchofthatisdatecertainversusassumedorapprovals?
PaulCampanelli(President,ParPharmaceutical):
Yes.Right.Sowe'vetalkedalittlebitaboutthis,around75%isthenewlaunches.
RandallStanicky(Analyst-RBCCapitalMarkets):
Okay.Great,thanks,guys.
PaulCampanelli(President,ParPharmaceutical):
Thankyou.
RajivDeSilva(President&CEO):
Thanks,Randall.
Operator :
JasonGerberry,LeerinkPartners.
JasonGerberry(Analyst-LeerinkPartners):
Ijustwantedtofollowuponthis505(b)(2)issuethatyou'refacing.IimaginetheVasostrictwasastrongproductforyouinthequarter,basedontheIMSdata.Buthowmanyproducts--itsoundslike--it'snotthatyoudidn'tget505(b)(2)productsapproved,butthattheFDAdidn'tremovecertainunauthorizedproductfromthemarket.Sohowmanyproductsarewetalkingabout?Ifyoucanprovidealittlebitmoredetailthere,thatwouldbegreat.
PaulCampanelli(President,ParPharmaceutical):
Sure.SoJason,wehavetwo505(b)(2)s.They'rebothapproved,sowhenwesaythedelay,we'retalkingabout,toyourpoint,workingwiththeFDAtofollowhavetheunapprovedsourcescomeoffthemarket.Now,whatwewereseeinginthecaseofVasostrict,weweresuccessfulinatimelyfashion.Butit'sgettingharderbecausetheFDAislookingtowardsdrugshortagesandreallyhavingahighconfidencethatwe'regoingtobeabletosupplytheentiremarket.
Sointhesetwoparticularproductsthatweweretalkingabout,that'swhat[wefaced].WearepartneringwiththeFDAtoshowthatwehavetheabilityandgiveconfidencethatwecansupplytheentiremarket.Wearehopingthatwasgoingtohappeninearly2016.Ithinkthebenefitofhavingtheseunapprovedsourcesexitthemarketwillberealizedin2017.It'snotthatitwon'thappen,it'sjustreallypushinguntilnextyear.
JasonGerberry(Analyst-LeerinkPartners):
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IfIcouldsqueezeafollow-upin.JustforSuky,Iknowyou'repushingouttheleveragetargettomid-3snowbeyondlate2016.Canyoujusttalkaboutsomeofthe2017variablesoncashgenerationthatwillhelpyoudelever?IknowyouhavetheFTClawsuitnow.You'vegotmesh.Butcouldyoujustwalkusthroughsomeoftheputsandtakesthere?
SukyUpadhyay(CFO):
Yes,sure.We'renotgoingtogiveguidanceon2017atthistime.Thereareanumberofmovingpartsthathavetoplayoutthroughout2016beforewe'reinapositiontoprovidethattypeofguidance.Butgoinginto2017,wewouldexpecttocontinuetodelever.Wedoseeourselvespushingthattargetfrom3to4timesfrom2016into2017orbeyond.
Thereareanumberofmovingpartsthatwillhelpwiththat.Withoutgivingspecificguidance,someofthethingsI'vepointedtoearlierislateinthisyear,wewillbuildabout$200millionofworkingcapitalaspartoftheSeroquelandZetialaunch;thatwillberecoveredinthefirsthalfof2017,asweactuallycollectthecashonthatrevenuebookedin2016.
Aswemoveintonextyear,weexpectmeshgrosspaymentstomoderatedownslightly.Thisyearwewouldseethosemeshpaymentsasbeingsomewhere$800millionto$900million.Nextyearwewouldpredictthatwouldbesomewherearound$600million,soweshouldseeastepdowningrossmeshpaymentsintonextyear.
Andthentheotherbigdriversareoncapitalexpenditures,wedoseeastepupthisyearaspartoftheintegrationofParandQualitest.It'sprimarilyaroundtheimplementationofERPsystems;thatshouldmoderatedowninto2017.AndthenwecouldseeaslightstepupinthecontingentconsiderationlinethatI'veoutlinedherefor2016,primarilyduetothe505(b)(2)productsthatPaulhasspokento,aswellasVGel.Sothere'sacoupleofmovingpartsthatcanhelpyoushapewhere2017cashmightbe.Butagain,wedoexpectovertimetodeleverbackintothat3to4timesrange.
JasonGerberry(Analyst-LeerinkPartners):
Great.Thanks.
Operator :
DavidAmsellem,PiperJaffray.
DavidAmsellem(Analyst-PiperJaffray&Co.):
Youmighthavementionedthis,soIapologizeifIdidmissit.ButonVasostrict,doestherebasedguidancereflectanycompetitionthisyearontheproducts?Andjustcanyoujustremindusyourlatestthoughtsonwhenyoudoexpecttoseecompetitorsonthatproduct?Thanks.
PaulCampanelli(President,ParPharmaceutical):
Okay.David,hi,thisisPaul.RegardingVasostrict,rightnowwearewellprotectedwithourAPIsource.Fromthatstandpointwefeelasthoughthatwearewell-positionedatleastthrough2017ontheexclusivebasis.WeareworkingverydiligentlywiththePTOinordertogetpatentstatus,whichyouwouldthenhaveourlegalteamimmediatelylistthepatenttotheOrangeBook.Thathasnothappenedyet,inprogress.Butatthispointintime,ourdefenseisreallyourAPIsource;thatshouldgetusthroughatleast2017.
DavidAmsellem(Analyst-PiperJaffray&Co.):
Sonocompetitionintheguidancethisyear?
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PaulCampanelli(President,ParPharmaceutical):
Nocompetitionintheguidance.
DavidAmsellem(Analyst-PiperJaffray&Co.):
Thankyou.
Operator :
ChrisSchott,JPMorgan.
ChrisSchott (Analyst-JPMorgan):
Thefirstoneisitjustseemslikethingshavegoneverybadveryquickly,anumberoflineitemsofyourbusinessoverthelastmonthandahalforso.Whatgivesyouconfidencethisroundofcuts,captures,andaccurateviewofthebusinessgoingforward?Hastherebeenanychangeinapproachtohowconservativeornotyou'rebeingwiththeguidancethistimearound?Orjustaddressinginvestors'concernsthatthingscancontinuetodeteriorateinthebusiness,canyoujust,atahighlevel,justaddressthatquestion?
Thesecondonewastalkingaboutthegenericoutlookin2017.Justfromourperspective,whatdoyouthinkit'sgoingtotaketostabilizethelegacyQualitestbusiness?Andjusthowareyouthinkingaboutgrowthintheportfoliooverall,oncewegetthroughthisdifficult2016andstarttothinkaboutthelonger-termportfolio?
RajivDeSilva(President&CEO):
Sure,Chris,letmejuststartandI'mgoingtohavePaulcontinue.Now,intermsofthethingsthathavegonewrongthisyear,you'reright,we'vehadseveralthingsthathavenotgoneourway.Andmanyofthosethings,anactuallyallofthosethingshaveplayedoutoverthecourseofthelastfourtosixweek,sointhesecondhalfofMarch,andinearlyApril.
ButIwillpointtothethreethingsthathavehappened,sothethreematerialthingsthathavehappened.Firstoneistheearlier-than-expectedlaunchoftheVoltarenGelgeneric.Weclearlydidn'tseeitcomingasearlyasitdid;wehadforecastedtowardthevery,verybackendofthisyearatworstandbestcaseinto2017.
Nowthatbeingsaid,weknewthattherewasgoingtobeagenericforVoltarenGelatsomepoint.Right?Andinfact,thenewlyrevisedagreementwithGSKandNovartisgiveustherighttoanauthorizedgeneric,sowewillhaveatailofthatproductgoingthrough2017andbeyond.Soyes,therewasbadnews,itwasearlierthanexpected,butnotsomethingthatfundamentallyimpactsourlonger-termgrowthtrajectory.
ThesecondeventthatPaulreferredtowasthisdelayinthe505(b)(2)programs,andagain,ourexpectationwhileitisbadnewsfor2016,isthatitwill,infact,manifestitselfin2017andwill,infact,benefit2017aswellas2018,dependingonwhentheFDAactuallyacts.
SothenitcomesdowntotheQualitest-basedbusiness,right?AndI'mgoingtoletPaulpickitup,butbasically,whatwe'veseenisarealresetinQ1.Paultalkedabouttheimpactoftheconsortiums,theconfluenceofcompetitorsthatcameinforsomeofourbiggerproductslikethe325-milligramhydroAPAPproduct,whichisQualitest'slargestproductthathappenedpostmid-March.
Allofthosethingshavehappenedinawaythathasresetthatbusiness.Andthewaywehavethoughtabouttheguidanceisthatwe'veclearlytakenaviewofsaying,howdowepredictthiserosion
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continuingthroughthisyear?Sowedoseecontinuederosionthroughthisyear,butbythesametoken,andPaulwillelaborateonthis,ourviewaswegointo2017,thecontinuederosioninthisbasebusinesswillmoderatetowhatyouwouldtypicallyseeinacommoditizedgenericbusiness.Andthefuturereallyisaboutthepipelineandsegmentslikethesterileinjectablessegment.
Sowiththat,letmejustturnitovertoPaul.Maybeyoucantalkabitaboutourconfidenceabouttheremainderoftheyearandthemovingpartsgoinginto2017.
PaulCampanelli(President,ParPharmaceutical):
Thanks,Rajiv.Chris,yourquestionreallyonstabilizationandreallywhydowethinkit'sgoingtogetbetter?Thefirstthingthatwewanttotalkaboutisthathistorically,we'vehadsuccesseswiththeQualitestportfolio,butwe'vegottocallitwhatitis.Itisamatureportfoliothatissusceptibletocompetition.Withthat,wearetransferringthestrategyfromthathigh-volumethroughputthathistoricallyhadsuccessesoneconomiesofscale,tothemoreParlegacysuccessmodelofhigh-valueproductswherewe'rehavingmoretechnicallychallengingproducts,thingsthataremoredifficulttomake.
Now,thefirstthingwehavetodo,wetalkedabouttherestructuring.Soweneedtotaketheportfolio,we'vegottoright-sizeit,we'vegottoberealsmartaboutproductselectionandwhatwe'regoingtocontinuetosellandmarket.We'remakingsomevery,verydifficultdecisionsimpactingsomeverytalentedpeopleinourCharlotteandourHuntsvillefacility.That'sbeenverydifficultforallofus.
That'sthestartingpointtofocusontherestructuringplan,anditgetsbackdowntoourcorevaluesofoperationalexecution,somethingthatwearereallydrivinghomeatPar.Rajivtalkedaboutitalready,thepipelineiswherewe'regoingtobeabletoresetourselves.Ultimately,75%ofourvaluecomingisfromtwoproducts,fourthquarterwe'vetalkedquiteabitaboutquetiapineandZetia.Notgoingtospendalotoftimethere,butwehavetoexecuteontheentireportfolio.Andatthesametime,we'vegottocontinuetorepopulatetheproductsaswelaunchthem.
Sothatcoupledwith,again,gottogetthe505(b)(2)s,andwehaveother505(b)(2)sacrosstheportfolio.It'snotjustthetwothatwereferringto,butweneedtoexecute,wehaveapathforward.Wehaveagoodstrategy.Theseareareasthataregoingtohelpusultimatelystabilizeourbase,andatthesametime,wecan'tlosefocusonourservicelevelsandourqualityandcontinuewithdiversificationinourportfolio.
ChrisSchott (Analyst-JPMorgan):
Thankyou.
Operator :
GregFraser,DeutscheBank.
GregFraser (Analyst-DeutscheBank):
It'sGregFraseronforGregGilbert.Ontheproductrationalizationefforts,doyouexpectthosetostarttohelpgrossmarginsduring2016orwillthosebenefits,willthebenefitsfromthoseeffortsberealizedmorein2017andbeyond?AndthenIJusthadaquickoneontheamendmenttothe[Stansvil]agreementwithTPGthat'smentionedinthepressrelease,canyoujustgiveusmorecoloronthatchangeandwhatyouknowaboutTPG'sintentionswithrespecttothestock?
PaulCampanelli(President,ParPharmaceutical):
I'lltakethefirstone,Rajiv,onthegrossmarginontherestructuring.Sothequestionongrossmarginfor
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2016,willbeabout$10million.
SukyUpadhyay(CFO):
Yes.We'veoutlinedthatinthegrossmarginwaterfallthatyouseeinthepresentation,Greg,inadditionandwe'dexpectthatbenefit,netbenefittostepuptosomewhereabout$40millionto$45millionin2017,andwe'llcapturethatfullrealizationof$60millionby2018.
PaulCampanelli(President,ParPharmaceutical):
Andthat'sonacumulativebasis.
RajivDeSilva(President&CEO):
Greg,justtoansweryourquestionontheTPGstance.SowhenTPGfirsttookshareswhenweacquiredPar,therewasaStansvilagreementthatpreventedTPGfromincreasingtheirstakeintheCompany.Sointhisinstance,with--concurrenttoToddSisitskycomingonourBoard,ourBoardtookthedecisiontoreleaseTPD--TPGfromtheStansvilagreement,subjecttocertainlimits.Andthoseareoutlinedinthe8-KthatwefiledwithamendedStansvilagreement.Buteffectively,itallowsTPGtopurchaseuptoanother$250millionworthofshares,subjecttoacapat10%ofownership.
Operator :
LiavAbraham,Citi.
LiavAbraham(Analyst-Citigroup):
ThepricingpressurethatyoutalkedaboutseemedtopertainprimarilytotheQualitestbusiness.Paul,canyoutalkaboutthepricingdynamicsspecificallyinthelegacyParbusiness?That'smyfirstquestion.Andthensecondly,justaquickquestiononthetaxrate.Canyoujustremindustheaccountingofyourtaxrate?IsthisaGAAPtaxrateoracashtaxrate,andwhatisyourcashtaxrate?Thanksverymuch.
PaulCampanelli(President,ParPharmaceutical):
Liav,thisisPaul.IntermsoflegacyPar,intermsofthepricingpressure,forthemostpart,it'sflat,maybelowsingledigitsintermsofprice,butforthemostpart,it'sflat.Andagain,we'reabletodefenditbecauseforthemostpart,thatbasebusinesscomprisesquiteabitofmodifiedrelease,sustainedrelease,we'vegotinjectablesaswell.Soalittlelesscompetition.
SukyUpadhyay(CFO):
Liav,movingtothetaxquestion,soourtaxrate,adjustedtaxrateisbasedonadjustednetincomeatastatutoryrate.Andthenfromthere,wedeductthebenefitsthatwehaveforintercompanydebtforanyIPandtransferpriceplanning,aswellasforacquiredattributes.Thatultimatelyresultsinouradjustedeffectivetaxrate,whichisandhasbeensignificantlyhigherthanourcashtaxrate.Ourcashtaxratehasbeennegativeforanumberofyears,andisexpectedtobeinthelowsingledigitsinourforeseeablefuture.
LiavAbraham(Analyst-Citigroup):
Great.Thankyou.
Operator :
MarcGoodman,UBS.
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MarcGoodman (Analyst-UBS):
I'mtryingtounderstandthese505(b)(2)sandhowsignificanttheycanbe.Iunderstandtheamountofrevenuethatyou'retakingoutofthisyearasguidance,becausethosetwoweredelayed.ButI'mtryingtounderstandhowbigcanthosetwoproductsbeinthefirstplace?ArethesegoingtobeproductslikeVasostrict,whichseemstobe--obviouslygoingtobreak$200millionthisyear,atleastthat'swhatitseems.Sojustgiveusasenseofthat.
Aswellastheother505(b)(2)sthatyouhave,asyousayinthepipeline,willweseeotherslaunchingin2017?Aretheycomingin2018,2019?Whendotheycomeandhowbigcantheybe?Andthenjustonequickone,whichisyoumentioned60productdiscontinuations.Whatarethesalesonthoseproductsonanannualbasisandhowmuchisthatimpactingthisyear?Thanks.
PaulCampanelli(President,ParPharmaceutical):
Mark,I'lltakethe505(b)(2).Now,startingwithVasostrict,we'vedisclosedwevalueofVasostrict,andit'salittlebitlargerthanyouhadindicated.It'sinexcessofaround$300million.
Now,the505(b)(2)sthatweareworkingwiththeFDA,wehavenot,forcompetitivereasons,disclosedspecificallythevalue.Iwouldsaythey'renotonthemagnitudeofVasostrict;they'rematerial,butnowherenearthemagnitudeofVasostrict.Ithinkforcompetitivereasons,Ithinkatthispoint,that'saboutasfaraswecanreallygoonthetwoproductsthatwe'reworkingwith,withtheagency.
Additionally,wehave,wedohavea505(b)(2)strategytotakeunapproveddrugs,runtherequisiteclinicaltrials,andbringthemtomarket.Andwedohaveahandfulofadditionalproductsthatareatvariousstagesacrosstheentireportfolioofeitherinjectables,orsolidoraldosageforms.Butatthispoint,we'rejustnotadvancedenoughtogointoanymoredetail.Andhopefullyinanotherquarterortwo,we'llbeabletoprovidealittlebitmorevisibility.
RajivDeSilva(President&CEO):
Marc,justtoaddtothat,thisiscertainlyoneofthecorecapabilitiesoftheParteam.Andaswelookfurtherintothefuture,wedoexpectthistobeoneofthecoredriversforthebusiness.Certainly,we'reencouragedbythesuccessthattheParteamhashadwithVasostrictsofar.Intermsoftheimpactoftheproductrationalization,Suky,doyouwanttotalkabouttherevenueimpact?
SukyUpadhyay(CFO):
Yes.Forthisyear,wewouldseethatrevenueimpactisabout$20million.Andthenonacumulativebasisinto2017,we'dseethataboutjustunder$90million,soitstepsupbyabout$70millionin2017.Andagain,ourbenefitsthatwetalkaboutfortheplantrationalizationarenetofthatrevenuereduction.Sowedostillexpecttosee$60millionmarginimprovementonafullrun-ratebasisnetofthesalesreduction.
Operator :
AnnabelSamimy,Stifel.
AnnabelSamimy(Analyst-StifelNicolaus):
Iwantedtounderstandthegrossmarginsalittlebitbetter.Itsoundsthatfromtherationalization,grossmarginscouldpossiblycomebackupin2017forward.Butareweevergoingtoseethelevelsthatwesawbeforeyouhadtakenthiscutdown?AndwhatcomponentoftheQualitestbusinessiscommoditized?Howmuchofthat60--howmuchoftheproductrationalizationispartofthatcommoditizedbusiness?
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Andoncethatgetsout,howdoyouseegrossmarginsrecoveringafterthis?Thanks.
SukyUpadhyay(CFO):
Sure.Sofor--Annabel,ifImisssomethingthere,justpleaseweighbackin.Butoverall,wewouldseethegrossmargins,allelsebeingequal,improveinto2017giventherationalizationofourproducts--sorry,ourplantsthatwetalkedabout,aswellasbecauseofthereductioninthelowermarginSKUsforproductsthatwe'rerationalizing.
Otherdriverstothinkaboutinto2017,aswecontinuetogrowtheParportfolio,whichweseeasonewithproductswithamarginprofileabovetheexistinggrossmarginaverage,wecouldseeimprovementfromthatdriver.Andtheninaddition,asweseegrowthfrombrandedwithinXiaflexaswellasBELBUCA,wewouldalsoseethoseaspotentiallyexpandingmarginsinto2017.
Soagain,we'renotinapositiontoprovidefull2017orbeyondguidance,butwedoseeapathtorecoveringgrossmarginsabovewhere2016aregoingtoland.
AnnabelSamimy(Analyst-StifelNicolaus):
Everrecoveringtothelevelthattheyhadbeenat?
SukyUpadhyay(CFO):
It'stooearlytotellatthistime,Annabel.
Operator :
LouiseChen,Guggenheim.
LouiseChen (Analyst-GuggenheimSecurities):
Justtofollowuponanearlierquestiononyour2016guidance,justcuriouswhereyouthinkthereisfurtherpossibilityfordownsiderisktoyour2016guidance?Ordoyouthinkthatthisnowincorporatesthebear-casescenarioaswell?Andthen,thisisnottobeanantagonisticquestion,butpeoplehavebeenaskingusatwhatpointyouwouldconsiderstrategicoptionsforEndoifyoucan'tcreateshareholdervalueonyourown.Thanks.
RajivDeSilva(President&CEO):
Thanks,Louise.Soletmetouchonbothquestions.Look,intermsofguidance,wedonottakeareductioninourguidancelightly.ItisdisappointingfortheCompanyandpersonallydisappointingformyselfaswell.Sowehavedoneanexhaustiveassessmentoverthecourseofthelastfewweekstoensurethatweputasmuchthoughtaspossibleintohowweassesstheremainderoftheyear.AndIwouldsayourguidancerangeforthefull-yearisarealisticrange.Right?
Sonobusinessiswithoutitsrisks,andIthinkyouknowthat,butwehavetakenasubstantialdownwardrevisioninthebasebusinessingenerics.WehavecommentedonhowwearetreatingVoltarenGel.Wehavealsotakentheopportunitytoaddresssomeotherpartsofourbrandedbusinessbecauseofthecontinuedpressureinthepainmarket.We'verebasedsomeofthoseproductsaswell,sowe'vereallytakentheopportunitytotakeahardlookattheforecastinthisrebasing.
Sowedon'ttakethislightly,andit'snotsomethingthatwewanttodomorethanonce.Sothat'sofapproachthatwe'vetaken.Weareconfidentinthisguidancerange,andwehaveateamthatisgoingtoworkextremelyhardatexecutingagainstthisrange.Butasinallbusinesses,atapointthatthereisalwaysrisk.
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AndthenLouise,Iwasalsojustgoingtoanswerthesecondquestionyouasked.Look,forusandourBoardofDirectors,ourgoalislonger-termshareholdervaluecreation.Socertainlythereis--thelast--what'shappenedwiththebusinessoverthecourseofthelastfewweeksandmonthsisadisappointmentandasetback.
ButIwouldpointoutthatourfuturegrowthdriversremainunscathedintermsoftheseparticulareventsthatwe'vetalkedabout.SowepointtoXiaflex,theXiaflexpipeline.WetalkedtoBELBUCA,whicheventhoughthereispotentiallyadelayintermsofthelaunchtrajectoryoftheproduct,wecontinuetobelieveinthefutureofthatproduct.
AndtheParpipeline,whichwastheprimarydriverofthatacquisitionisrobustasever;itcontinuestogrow.Thesterileinjectablesbusinessisrobustandgrowing.AndIhaveeveryconfidenceinPaulandtheteamintermsofgettingthegenericsbusinessbackontrack.
Sofromthatstandpoint,webelievethatinthehandsofourmanagementteam,withappropriaterebasingthatwe'vedonein2016,thatthereisapathtoreturningtoorganicgrowth,improvingourmargins,anddelevering,andtherefore,tocreatingshareholdervaluegoingforward.Thatbeingsaid,we'vealsobeenveryclearthatourBoardisashareholder-friendlyboard.Andifthereiseveranystrategicalternativethatpresentsitself,ourBoardwill,ofcourse,evaluateit.
Operator :
AndrewFinkelstein,Susquehanna.
AndrewFinkelstein (Analyst-SusquehannaFinancialGroup):
Couldyoutalk--I'llgiveyouacouplethingsyoucanfocuson.Butatahighlevel,asyoutalkaboutthenewstrategyandyou'vereassessedtheenvironment,Ithinkyouhighlightedwherethegrowthdriversyoucurrentlyhave.Butasyoulooklongertermattryingtoincubateadditionaldrivers,wherearetheopportunitiesinthisenvironmentandthetypesofproductsthataregoingtohavetherightriskrewardtopursue?
Andthenasyougoaboutmanagingthat,couldyoutalkalittlebitabouthowyou'rethinkingaboutbalancingcashgenerationinthenearterm,particularlywithregardtoleverageratiosversusinvestmentsyoumaywanttomakeinlonger-termopportunities?Andjustspecificallyonthat,asyoutalkaboutrationalizingsomeofthelegacyproducts,weretheseloss-makingorissomecashflowbeinggivenup?Andifso,what'sthebenefitindoingsoatthispoint?Thanks.
RajivDeSilva(President&CEO):
Thankyou,Andrew.Letmejusttakeyourthreequestions,andIwillletPaultalkedabouttheproductrationalizationquestionattheend.Sofromalong-termstandpoint,IthinkwhatwecontinuetobeveryoptimisticaboutisfollowingtheXiaflexpipeline.Sowe'vepursuedthecelluliteindication;ourphase2btrialisintheclinicandcurrentlyrecruitingpatients.Wefeelpositiveaboutthat.
Andyou'vealsoseenthatwehaveincreasedconfidenceinbeingabletomoveforward,atleastforotherindicationsintotheclinic.Andtheyfallgenerallyintotheareasofaesthetics,aswellasothertherapeuticindicationsaroundthenon-collagenase.Soit'sonecorepriorityforusiscontinuedandincreasedinvestmentinthatR&Dpipeline.
Inthepainmarket,clearlyintermsofpublicpolicyandregulatorypressuresisincreasingthemarket.Aswesaidbefore,BELBUCAhasarealprofilethatwouldreallybenefitintermsofsomeofthecurrentconcernsaroundscheduleIIopioids,sowedothinkthere'safuturethere.
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Butaswelookfurtheroutintothefuture,buildingonourportfolioacrossourbrandedbusiness,wecouldseeourselvesinmultipleareasthathavesimilarcharacteristicstootherspecialtyareaswherewithasmallerfocusonmarketingfootprint,thatwecanbesuccessful.AndfollowingsomeofthetherapeuticareaswhereXiaflexisgoingtogetustoisgoingtobethebestwayforustopursuethat.
Nowleadingtoyournextquestionintermsofcashandourprioritiesforusingthecash,asSukyexplained,whenwetalkedaboutdelevering,wedoexpecttocontinuetoprioritizedelevering,anddeleveringbacktothe3to4timesisanimportantgoalforus.Now,thatisdelayedfrom2016into2017,butcontinuestobeanimportantgoalforus.
Atthesametime,investinginourR&Dpipeline,bothinXiaflexaswellasPar,aregoingtobeveryimportantprioritiesforus,whichwewillbalanceaswego.Sothosearegoingtobethemostimportantusesofcash.Andbeyondthat,obviously,oncewegetintoapositionwherewehaveexcesscashandhavetheopportunitytolookatperhapsbolt-onacquisitions,eitherforthegenericsbusinessorthebrandedbusiness,wewillcertainlylookatthoseastheycome.Ourpreferencewouldbetodosointhebrandedspace,butthatisawaysout.Wewanttomakesurethatweexecuteagainstourgrowthplananddeleverasourprimarypriorities,andwealwayskeeptheoptionofreturningcashtoshareholdersasanalternativeaswell.
Now,letmejustturnthisovertoPaul,becauseIwanthimtotalktoyouaboutsomeofthenewareasthatwemightexpandtheParpipelineintoaswellasthequestionthatyouhadonproductrationalizationandtheprofitabilityimpactofthat.
PaulCampanelli(President,ParPharmaceutical):
Thanks.It'sobviouslyaverybroadquestion,andIwanttostartbysayingthis--thedecisionintermsof[culling]theportfolio,asIsaid,very,verydifficultforus.ButasyoulookatlegacyPar,andaspartofnormalcourse,itreallyisanevolutionwhereyouneedtoconsistentlylookatyourportfolio.Youhavetomakesometoughdecisions.Youhavetotakeyourunprofitableproducts,orproductsthatyou'refeelingprettypainandpressureon.
Thatbeingsaidwe'rethefourthlargestgenericCompany.Weareincrediblyrelevant,wewillcontinuetoberelevantintheindustry,andIwanttomakethatstatement.Andwhenyou--ifwanttobeabletocompetewiththefourlargeconsortiums,addWalmartin,thosefivecompaniesrepresentinginexcessof90%share,youreallyneedawell-balancedportfolio.
AndwhatImeanbythatisyouneedyourfairshareofparagraph4s,youneedhard-to-make--technicallychallengingsolidoraldosageproducts.Youneedinjectableproducts,andyoudoneedcommoditiesthatareprofitable.Sothat'sgoingtobeveryimportantforusintermsoftheQualitestportfolioonago-forwardbasis.
Now,ondiscontinuationproducts,harddecisions,butbycullingtheportfolioinareasthat'sgoingtohelpus,productsthatareultimatelybeingsoldatlossesandwemakethetoughdecisions,it'sgoingtohelpusonthecashside.We'regoingtohaveareductioninouroperatingcosts.We'llhaveareductioninworkingcapital.Andwe'llalsonotneedtoinvestasmuchincertainfacilitiesfromaCapExstandpoint.Sofromthatstandpoint,generallyspeakinghighlevel,thosewouldbeareasthatwewouldhavesavingsin.
SukyUpadhyay(CFO):
AndIwanttojustcomebacktoAnnabel'squestionjustplayingoffofwhatPauljustsaidtherearoundgrossmarginoutlook,IthinkIwasansweringmaybealittlebittoonarrowlyandjustthinkingabout2017.ButgiventhegrowthdriversthatwehavethatRajivoutlinedearlier,andgiventhefocusonexecution
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andefficiencythatPaulandhisteamhavearoundourmanufacturingnetwork,Ithinkwedoseeapathtogetbackintothemid60sovertime.
We'renotgoingtotimeboundthatatthispointyet.We'regoingtoletmoreof2016playout,andaswemoveinto2017,we'llhaveabetterviewintothat.ButIdothinkthegrowthdriversareatagrossmarginlevelthatarehigherthanouroverallcorporateaverage.Andagain,throughefficiencythatPaulandhisteamwilldrive,therecouldbeapathwaythereovertime.
Operator :
DouglasTsao,Barclays.
DouglasT sao (Analyst-BarclaysCapital):
Justfirst,intermsofVoltarenGel,whendoyouanticipatelaunchinganauthorizedgeneric?AndthenIhaveaquickquestiononBELBUCA.
RajivDeSilva(President&CEO):
Iwill--letmejustaddressthatonPaul'sbehalf.We'renotgoingtotalkaboutwhenwemightlaunchanauthorizedgeneric,forcompetitivereasons.Andalotofitisgoingtodependonhowthecompetitiveenvironmentevolveswithouronecompetitoronthemarket.Sofar,weareveryhappywiththestrategiesthatwehaveputaroundmitigatingerosionofourbrandedproduct.
DouglasT sao (Analyst-BarclaysCapital):
Okay.AndthenjustintermsofBELBUCA,obviously,theinitiallaunch,thefirstfewweekshasgonealittlemoreslowly,asyouacknowledge.Justcuriousfromyourperspective,whendoyouthinkweshouldstarttoseeaninflectionpointinthescripts?Andthenjustalso,obviouslyyounotedthatverygoodcoverage--defaultcoverageexistsrightnow.Whendoyouanticipatefinalizingthatandhowarethosetalksgoing?Andthepricingthatyouexpecttoget,isthatinlinewithyourexpectations,better,orperhapsalittlebitmorechallenged,giventhedynamicsinthepainmarketrightnow?
RajivDeSilva(President&CEO):
Great,thanks,Doug.Soaswesaid,it'sstillearlydaysofBELBUCA,right?Andthelastweekforwhichwehavedata,IthinkistheweekofApril21st.Andwehadroughly650prescriptions.Andwecontinuetoseemomentum,right?
Andit'sdifficulttopredictexactlywhentheinflectionpointisgoingtobe,butwhatIcansayisthattheanecdotalfeedbackandthequalitativefeedbackfromphysicianshasbeenverypositive.Imyselfhavespenttimeinthefield.AndthefactthatthisisascheduleIIIproduct,atthispoint,allthenewpressurethereonphysicianswiththenewCDCguidelinesandeverythingelse,themessageresonates.
Butthatbeingsaid,fromtheverybeginning,wepointedtosomethingthatwouldlikelyleadtorequiringmoretimetoeducatephysicians,andthatisthetaperingandtitrationrequiredwiththisproduct.SototheextentthatyouaretryingtomoveapatientfromothertherapyontoBELBUCA,youaretotaperthatpatientdown,perourlabel,andthentitratethepatientbackup.
Andformostphysicians,whattheyaretryingtodoistofigureouttheirowngutfeelforhowthisworks.Clearly,fromapromotionalstandpoint,wehavetostandbehindwhat'sonthelabel,buteveryphysicianwillfigureoutwhatheorsheiscomfortablewith.
Iwouldalsosayanotherencouragingsignisthattherepeatprescriptionsfromthosewhoprescribeisprogressingverywell,sowehaveasmanyrepeatprescriptionsnowaswehavenewRXs.Theseareall
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goodindicated.I'mgoingtohesitatetogiveyouanexacttimeframeofwhenthere'sgoingtobeinflectionpoint,butIwouldpointtothesecondhalfofthisyearintermsofwhenwewouldexpecttoseecontinuedimprovementinit.
AndDoug,I'mafraidI'veforgottenthesecondpartofyourquestion.Oh,itwasonthemanagedcare.Itisprogressingverywell.Aswehavesaidbefore,wehaveroughlyabouttwo-thirdsofcommerciallivescoveredatleastwithdefaultcoverage.Wemadeverygoodprogressintermsofconvertingthedefaultcoverageintoactualcoverage.
Manyotherplans,theyrequire--haveconfidentialityagreementsthatpreventusfromtalkingaboutthesethingsinapublicway.ButonethatwecanpointtowherewehavepermissiontotalkaboutisExpressScripts;thathasbeenaverygoodwinforus.Wearecontinuingourdiscussionswithotherplans.Andsofar,it'sgoingexactlyaswehadexpected.
Now,theonepiecethatwewouldexpecttonotgettountil2017,istheMedicarePartDcoverage.Butthatisonparwithallothersituationswhereaproductlaunchismidyear.We'vealsoimplementedaco-payprogramthatbasicallyputsourproductonparwithcompetitiveproducts.Sofromallaspects,fromaccessstandpoint,wearemakinggoodprogress.
DouglasT sao (Analyst-BarclaysCapital):
Great.Thankyou.
Operator :
KenCacciatore,CowenandCompany.
KenCacciatore (Analyst-CowenandCompany):
Justreiteratingwhatyouallsaidthatyou'regoingtobegoingthroughsomereallypainfulanddifficultrestructuring.SoI'mstillalittlebitconfusedwhythereisn'talotofcontemplationaboutlettingyourbusinessmergewithanothertoallowforatotalrestructuring,maximizeallaspectsofthebusiness.
AndIguessthequestion,again,iswhystaystandalone?Youcouldtakeequityinapro0formacompany,realizethebenefitsofalargerentity,whilethevalueisextracted.Andforyourshareholderswantingtoknow,arethereindeedoptionsonthetable?Andwhyisn'tthisvery,veryhighonthelistofoptions?Thankyou.
RajivDeSilva(President&CEO):
Thanks,Ken.Soletmereferbacktomypreviousanswertoasimilarquestion,andI'llansweryourquestion.Endoftheday,whatismostimportantforourteamandforourBoardistoensurethatwerighttheshipoperationally,addressthechallengesthatwe'veseen,andmaketheprogressthatweknowwecanmakeasateam.Right?Thatbeingsaid,we'vealsoalwaysbeenclearthatweareshareholder-friendlymanagementteam,orashareholderfriendlyboard,andwewillalwayslookatstrategicoptionsthatpresentthemselves.
OneofthethingsthatI'vesaidinthepastisalthoughfromadebt-marketperspective,aswellaswhereourownequityistrading,wearenotinapositiontodosubstantialacquisitions.ButIhavepointedoutthatmergersarecertainlyoptionsthatwewouldconsideriftheypresentthemselves,particularlywhereeitheronarelativevaluebasisit'ssomethingthatmakessenseorweconcludethatit'sthebestinterestofourshareholders.Socertainlyweremainopentothoseoptions,butourprimaryfocusandpriorityisonoperationallyexecutingagainstourplan.
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KenCacciatore (Analyst-CowenandCompany):
Thankyou.
Operator :
IrinaKoffler,Mizuho.
Ir inaKof f ler (Analyst-MizuhoSecurities):
Iwantedtogothroughthe505(b)(2)again.Itsoundslikeit'sabigpartofyourgoingforwardstrategy,andIjustwantedtounderstand,howcompetitiveisthisspace?Areyouguysgoingtogetanyadditionalplayersinthemarketbasedonyoursetbackanddelayinto2017?Andthengoingforward,wehavetorelyonyourexecutionoftheseprograms,andyetwehadadelaythisyearalready.Sowhatcanyousaytogiveusmoreconvictioninyourexecutionoftheseproducts?Thanks.
RajivDeSilva(President&CEO):
IwillletPaulanswerit.IthinkIwouldjustpointtoVasostrictasanexampleofwhyyoushouldhaveconfidencein[Paul's]abilitytoexecute.It'sbeenanextraordinarilysuccessfulproductstrategyandonewhereIdon'tthinkwe'veseenthefinalchapteryet;Paulcontinuestoworkonit.ButPaul,whydon'tyouanswertherest.
PaulCampanelli(President,ParPharmaceutical):
Irina,again,attheendoftheday,wehaveabroadstrategyintermsofgettingunapproveddrugsthroughtheFDAthroughthe505(b)(2)process.Historically,thesearetypicallyolderdrugswhichwehavetorunrequisiteclinicaltrialsinordertogetNDAstatus.
Whenwecanchangeaproductandwhenwecangetintellectualproperty,obviouslywe'regoingtodothataggressively.Oncertainproductswe'reabletodothat,andcertainproductsweareunabletodothat.
Inthecaseoftheproductsthatwe'rereferringtoatthispointintime,IwouldtellyouthatIdon'tbelievethatintellectualpropertyisasstrategicaswewouldlikeittobe.However,thereareotherthingsthatwewouldbeworkingtowardsatthispointintime,Iwouldnotwanttodiscloseforcompetitivereasons.Butwe'rehopefulthisisnotgoingtobeaone-yearandouttypeof505(b)(2)wherebywespendtherequisitePDUFAfees,buildupaproduct,andtheninvitecompetition.
Sowedohavestrategiesoutsideofintellectualpropertythathopefullywillgainuslongevity.Butwe'renottalkingcompoundpatentIPwhereyou'retypicallyseeingmultipleyears.That'snotwhatwe'retalkingabouthere.
Operator :
DavidRisinger,MorganStanley.
DavidRisinger (Analyst-MorganStanley):
Acouplequestions.Sowithrespecttothegenericpricingandcompetitivepressuresthathityourgenericsguidance,couldyoujusthelpusunderstandhowmuchofthatisfromtheQualitestbusinessandhowmuchishittingtheParbusiness?SoI'llmakeupanumber.Let'ssaythatthehitwas$10.Ofthe$10hit,wasittwo-thirdstoQualitestandone-thirdtoPar,orwasithalfandhalftoeach?Justtryingtounderstandthat.
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Andthensecond,withrespecttoXiaflex,howshouldwethinkaboutthatproductsalessequentiallyincomingquarters?Andthenfinally,actually,andthisoneisforSuky,youhadmentionedmovingpartsin2017.Couldyoujusttalkaboutthebig,bigmovingpartsthatareuncertain?Obviously,there'ssomecertaintywithZetiaandSeroquel.Butwhatarethemovingpartsforrevenuethatareuncertainfor2017atthispoint?Thankyou.
RajivDeSilva(President&CEO):
David,letmehityourXiaflexquestionsandthenIwillgotoPaulonthepricingquestionandthemovingpartsin2017.Look,IthinkonXiaflex,wehadaverygoodfirstquarter.Wehadgrowthofabout21%whenyou'relookingattheUS.Andaswelaidoutinourpresentationandmycomments,ourexpectationforthefullyearisproductgrowthshouldbesomewhereinthemidtohighteensrange.Right?
Now,clearlyweareworkingtoacceleratetheproduct,butthatisaviewofwhereourbestcurrentthinkingis.Soifyoutakealookatthe21%andthefull-=yearatmidtohighteens,therewillbeaslightmoderationasweheadintothenextfewquarters.Butthisisstillgoingtobewellwithinthestrongdouble-digitgrowthprofilethatwepredictedfortheproduct.
PaulCampanelli(President,ParPharmaceutical):
David,yourquestiononthepriceandthepressure,whenwelookattheQualitestportfolio,whichhadserveduswellforsomanyyears,asIsaidbefore,itisamatureportfolio,whichissubjecttomorethannormalcompetition.Wewereverystronginpain;abigportionofourportfolioisdirectedtowardspain.It'snotquitethebarrierthatitoncewas,andasaresult,thepricingpressurethatwesawwasabout80%tiedtolegacyQualitestandabout20%tiedtolegacyPar.
RajivDeSilva(President&CEO):
Andthenletmestartonyour2017question,andI'llaskSukytojumpin.Solet'stakethefollowingviewon2017,solet'stalkaboutwhat'schangedsincewelastputinourexpectationsfor2017.
SothethreemainchangeshavebeenaresettingofexpectationsforourQualitestbasebusiness;thedelayinthe505(b)(2)program,aswetalkedaboutwhichisgoingoutof2016butwillbeimpactingpositively2017and2018,forthatmatter;andthenwetalkedaboutVGel,whichwefullyexpectedtobegenericizedasweheadedinto2017.Itjusthappenedmuchearlierthanweexpected,andwedohaveauthorizedgenericasanoptionforustousegoinginto2017.SotherealmajordownwardrevisionthereistheimpactoftheQualitestbasebusiness.
Now,thereareothermovingpartsthatwillimpactwhatourfinalguidancein2017isthough,right?WewillhavetotakeaviewonexactlyhowBELBUCAisgoingtodo.Italldependsonwheretheinflectionpointisgoingtobe.
Obviously,tailwindsbehindXiaflexwillcontinuetogrow.Wewillknowmorebythemiddleofthisyearintermsofwhat'shappeningwithOPANA.WehaveaJuly29thPDUFAdateforourADFrelabelingrequestwiththeFDA.AndwewillalsoknowmoreintermsofsomeoftheotherpipelinelaunchesandotherprogramsthatPaul'spursuingintheParbusinessandexactlywheretheywillfallin2017.Right?Sothosearesomeoftherealmovingpartswehave.
We'vealsosignaledthatweexpecttoincreaseourR&Dspend,particularlybehindtheXiaflexpipeline,andtotheextentthatPaulhasnewideasfromanR&DstandpointwewilltryveryhardtomeetanyadditionalfundingrequirementsintheParpipelineaswell.Sothosearesomeofthemovingparts.Idon'tknow,Suky,whetherthere'sanythingelsethatyouwouldpointto?
SukyUpadhyay(CFO):
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Ithinktheonlyotherthingisthestronggrowthwe'vebeenseeingintheinjectablesportfolio.Wecontinuetoseethatmomentuminto2017.It'sjustunderstandingwhereourexitisin2016beforewemakethatfinalcall.
Operator :
ElliotWilbur,RaymondJames.
DanielSanchez (Analyst-RaymondJames):
ThisisDanielSanchezonforElliotWilbur.Ijustwantedtogetyourlatestthinkinginregardstotheeventualresolutiontimelineandexpected2016paymentliabilitiesasyouworktopushthemeshsettlementissuebehindyou?Andifyouthinktheworstpartsandtheclaimswiththehighestvalueareover?
RajivDeSilva(President&CEO):
Sure.Soletmejustcommentontheoverallstatusofmesh,andthenI'llletSukytalkaboutthefinancialaspect.Soaswetalkedaboutinourfourth-quartercall,wetookanewapproachtohowwe'redealingwiththetail,whichisthatwetookstepstoresolvethehigher-qualityclaims,whichiswhatledtoanincreaseinaccrualthatweannouncedinthefourth-quartercall.
Sincethen,thesituationhasnotchanged.Thereisallegedpotentialforanother8,000casesinthetailthatwedisclosed,butwewerealsoverytoquicktopointouttheexpectationisthatalargeproportionofthosecasescouldbeoflowerquality.Wedon'thaveallthefactsaroundthem.
Wealsopointtothefactthatthereisapotentialfraudulentschemethatisrunningthroughmanyofthesecases,whichweareinvestigatingcurrently.Aswepointedoutbefore,thesearetypicallythetypesofthingsyouseeatthetailendofa[massstart]situation.Wecan'tgiveyouapreciseprojectionofwhattheenddateis,butwehaveconfidencethatwe'reseeingtherealtailhere.
MaybeSuky,youcantalkaboutthecashexpectationsin2016.
SukyUpadhyay(CFO):
Sure.Attheendoffirstquarter,wewillhaveatotalproductliabilityaccrualofabout$1.9billiononthebalancesheet.You'llseethatinour10-Q,whichwillbeissuedintheverynearfuture.Ofthat$1.9billion,theamountofrestrictedcashorcashthat'salreadybeenputintoqualifiedsettlementfundswasabout$0.5billion,whichleavesaresidualof$1.4billiononagrossbasistobepaid.We'dexpectofthatremaining$1.4billion,about$750milliononagrossbasistobepaidbetween--fortherestof2016.Andthenabout$600million$650millioninto2017,ortheresidualofthat$1.3billionbalance.
Sothat'swherewestandfromacashcallbasis.Aswetalkedaboutearlier,wedidreceivethefederaltaxrefundthatwepointedtoearlierthisyear;thatcameinearlyApril.Wecontinuetolookatwaystoprovideashieldaroundfutureliabilities.
DanielSanchez (Analyst-RaymondJames):
Thankyou.Andanylineofsightastothemagnitudeofpotentialfraudcasesorisitstilltooearlytotell?
RajivDeSilva(President&CEO):
It'sanactiveinvestigation,wehaveissuedsubpoenasinthecase.AndarealsoworkingwiththejudgeintheNDLcase,aswellasotherpartsofthelawenforcementinfrastructureinthecountry.Sowereallycan'tcommentmoreonit.
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DanielSanchez (Analyst-RaymondJames):
Thankyou.
Operator :
RohitVanjani,Oppenheimer.
Rohit Vanjani(Analyst-Oppenheimer&Co.):
Sorry,ImaybemissedsomeofthecommentaryonVoltaren,toDoug'squestions,buthowmuchdidyoureduceyourVoltarenestimatesbyorhowmuchsharedoyouanticipatethenewcompetitortaking?AndthensamethingwithFrova,areyouseeinganewcompetitorthere?Andifso,howmuchdidyoureduceestimatesby?
Andthensecondly,forthegenericsunit,couldyouhelpmeunderstandthebusinessalittlebitbetter.Doyouhavecontractsprimarilyatthebeginningoftheyearandthat'swhereyougettherenegotiationshappening?Orarethemajorityofthecontractsstaggeredthroughouttheyear,orareyouseeing[rofers]whereyouarechoosingnottoengage?Oraremostoftheproductssoldadhocoratwill,whereyourcustomercanmoveprettyfreely?
RajivDeSilva(President&CEO):
SoletmejusttalkaboutbrieflyaboutVGelandFrovo,andIwillpassitontoPaul.WithrespecttoVoltarenGel,wehavepointedto,inthematerialsfortoday'scall,therelativeimpactontherebasingofour2016guidance.Wearenotgoingtodiscussmarket'sexpectationsanymore,justotherthantosaythere'sasinglecompetitoronthemarket.Andweareeffectivelydefendingthebrandedproductatalevelthatwewouldexpecttodo.
WithrespecttoFrova,yeswedohaveanewcompetitorthatisGlenmark,andcurrentlyParhasalsolaunchedourauthorizedgeneric.Sothatisalsointhemarket.Maybeyoucanaddresstheotherquestion?
PaulCampanelli(President,ParPharmaceutical):
Sure,intermsoftheconsortiums,the[cycling],Ithinkyouhadthatexactlyright.Sotheyarestaggered,soeachconsortiumhasadifferenttimeframethatwebidagainst.Soit'snotlikeyoucomein,inQ1andhavetodealwith3oftheconsortiums.[Reddo]doesnotactuallyputoutbids,theirexpeditionisthattheregoingtobeguaranteedbestpricing.Sotheirstyleisalittlebitdifferentasopposedtotheone-stopprogramortheweed-[bad]programoreventheECONDISCprogram.
RegardingRovers,thatisexactlywhatitis.Soafteryougothroughtheconsortiumbidcycle,thatdoesnotmeanthatyouarestillnotexposedforRofers.Thatbeingsaid,wedefendagainstRofersandwehaveourfairshareofwins.Youhaveyourfairshareoflosses,andattheendoftheday,Ithinkonago-forwardbasis,thisisanareathatwe'refairlystrongin,intermsofatleasetoprotectourselvesfromthelegacyParstandpoint.Andweare,inessence,right-sizingtheQualitestbusinesslegacysideinordertobeabletodefendagainstRofersgo-forwardbasis.
Rohit Vanjani(Analyst-Oppenheimer&Co.):
Great.Thanks.
Operator :
KevinKedra,Gabelli.
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KevinKedra(Analyst-Gabelli&Company):
Justwondering,whenyouthinkaboutthatstrategically,howmuchsensedoesitstillmaketokeepthegenericandthebrandofbusinesstogether?Arethereanythoughtsaboutmaybeseparatethosebusinesses?Andthenactually,I'lltakethatandI'llbegood.Okay.Thanks.Look,it'sastrategicquestion.OneofthethingsthatourCompanyhasbenefitedfromoverthecourseofthelastthreeyearssincemyarrival,whenwereallystartedtotransformthebusiness,isinfactthediversityofthebusiness.Right?Sothegenericsbusiness,especiallywiththeadditionofPar,despitetherebasingthatwearetaking,isahighlydiversifiedbusinesswithmultiplegrowthdrivers.Andwe'vealsotakenthestepstobuildcriticalmassinourbrandedbusiness.
ButIhavebeenalsoopenthatfromaforward-lookingstandpoint,atacertainpointintimewhenwehavecriticalmassinbothourbrandedbusiness,aswellasourgenericsbusiness,thesecanbebothtwoveryviablestandalonebusinesses.Sofromastrategicstandpoint,weremainopentothinkingaboutcreativewaysofcreatingthatshareholdervalue.ButasIpointedtoearlierinmycomments,ourprimaryfocusrightnowisoperationalexecution.WehaveafullplateinParintermsofrestructuringthatneedstobedone,progressonthepipeline,aswellasinthebrandedbusinessgrowingXiaflexandgrowingtheBELBUCAandinvestinginthepipeline.Butcertainly,wekeepallstrategicoptionsopentousaswethinkaboutthefuture.
Operator :
IwouldnowliketoturntheconferencebackovertoRajivDeSilva,CEOandPresident.
RajivDeSilva(President&CEO):
Thankyou,andIwanttothankallofyouforyourattentiontoday.Therehavebeenalotofverygoodquestions.Andwe'vetalkedalotaboutthedifferentfactorsthathaveimpactedour2016guidance,aswellasotherfinancialupdates.ButwhatIhopethatyouwilltakeawayfromthiscalltodayisthatdespitetherebasingofour2016guidance,Endoisafundamentallydifferentandstrongerbusinessthanitwasin2013.Anditisalsoamorecompellinginvestmentandgrowthstory.
In2013wehadtwoprimaryanddecliningassetsatthattimeandaveryfragmentedbaseofbusinessacrosshealthcaresolutionsdividedinpharmaceuticals.Youfast-forwardtotoday,we'verebuiltourbrandedportfolioandpipelinewiththeacquisitionofAuxiliumandparticularlyXiaflex.Wedivestednon-corebusinesses.We'veachievedscaleanddifferentiationinourgenericsportfoliowiththeadditionofPar,andfrankly,thatiswhatthefutureisgoingtobeabout.Particularly,asweseetherebasingofourlegacyQualitestbusiness.Weestablishedaninternationalstructureandfootprintforgrowthandexpansion.Wenarrowedthemeshtail,andwehavebuiltabusinessgeneratingsignificantEBITDA,evenafterthisrebasing,andfreecashflowthatweexpecttogrowgoingforward.
SonoonelikestorebaseguidancemorethanI.Butwehavenowresetourbusinesssothatwecanmoveforwardandeffectivelydrivegrowthandvalue.Andwethankyouforyourcontinuedsupport.Thankyouverymuch.
Operator :
Ladiesandgentlemen,thisconcludestoday'sconference.
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CompanyName:EndoInternationalPLCCompanyTicker:ENDPSector:HealthCareIndustry:Drugs
EventDescription:Q12016EarningsCallMarketCapasofEventDate:6.08BPriceasofEventDate:16.17
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