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ENDP > SEC Filings for ENDP > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for ENDO HEALTH SOLUTIONS INC.

Form 10-Q for ENDO HEALTH SOLUTIONS INC.


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, liquidity and capital resources and critical accounting estimates of Endo. This discussion should be read in conjunction with the accompanying quarterly unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K, for the year ended December 31, 2012 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial and operating results. Except for the historical information contained in this Report, including the following discussion, this Report contains forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" beginning on page i of this Report.
EXECUTIVE SUMMARY
During the first quarter of 2013, Rajiv De Silva was appointed as our new President and Chief Executive Officer. Mr. De Silva was also appointed to the Board of Directors effective March 18, 2013. With Mr. De Silva's arrival, the Company initiated an enterprise-wide business assessment of the Company's strategy, cost structure and operating model to develop a plan to accelerate both our short-term and long-term growth while focusing on further enhancing operating efficiency and effectiveness.
Also during the first quarter of 2013, we commenced Lidoderm® shipments to the wholesaler affiliate of Watson pursuant to the 2012 Watson Settlement Agreement. Total units shipped to Watson's wholesaler affiliate during the quarter were approximately 152,000.
On March 26, 2013, we amended and restated our existing credit agreement to extend its term by approximately two years and modify its covenants to provide us with greater financial and operating flexibility. The amended and restated agreement (the 2013 Credit Agreement) extends the maturity dates of our $500 million Revolving Credit Facility and our Term Loan A Facility to March 15, 2018. The 2013 Credit Agreement keeps in place the Company's Term Loan B Facility which matures on June 17, 2018. The 2013 Credit Agreement also permits additional revolving or term loan commitments up to $500 million (or an unlimited amount in certain circumstances) from one or more of the existing lenders or other lenders with the consent of the Administrative Agent without the need for consent from any of the existing lenders under our credit facility. Also in April 2013, in a joint meeting of the Advisory Committee for Reproductive Health Drugs and the Drug Safety and Risk Management Advisory Committee, panelists voted on whether AveedTM is safe as a treatment for male hypogonadism. The results of this vote were split 9 - 9. Panelists also voted on whether the proposed instructions for use in AveedTM's product labeling are sufficient to ameliorate the risk of severe post-injection reactions. The results of this vote were 17 against, 1 in favor. The FDA is not required to follow advisory committee recommendations. The Prescription Drug User Fee Act (PDUFA) date related to our New Drug Application (NDA) for AveedTM is set for late May 2013.
RESULTS OF OPERATIONS
Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to (1) the timing of mergers, acquisitions and other business development activity, (2) the timing of new product launches, (3) purchasing patterns of our customers, (4) market acceptance of our products, (5) the impact of competitive products and products we recently acquired and (6) pricing. These fluctuations are also attributable to charges incurred for compensation related to stock compensation, amortization of intangible assets, asset impairment charges and certain upfront, milestone and other payments made or accrued pursuant to acquisition or licensing agreements.
Consolidated Results Review
Revenues. Revenues for the three months ended March 31, 2013 increased 3% to $708.5 million from $690.6 million in the comparable 2012 period. This increase in revenues was driven by revenue growth from our Qualitest segment, partially offset by revenue decreases at our Endo Pharmaceuticals, AMS and HealthTronics segments.


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The following table displays our revenues by category and as a percentage of total revenues for the three months ended March 31, 2013 and 2012 (dollars in thousands):

                                  Three Months Ended March 31,
                                    2013                  2012
                                  $           %         $        %
Lidoderm®                   $   187,024        26   $ 210,014     30
Opana® ER                        56,327         8      81,086     12
Voltaren® Gel                    36,110         5           -      -
Percocet®                        26,618         4      23,380      3
Frova®                           13,777         2      15,644      2
Supprelin® LA                    13,426         2      13,446      2
Other brands                     24,307         3      20,004      3
Total Endo Pharmaceuticals* $   357,589        50   $ 363,574     53
Qualitest                       178,253        25     145,345     21
AMS                             122,652        17     130,166     19
HealthTronics                    50,025         7      51,548      7
Total revenues*             $   708,519       100   $ 690,633    100



* Percentages may not add due to rounding.

Lidoderm®. Net sales of Lidoderm® for the three months ended March 31, 2013 decreased 11% to $187.0 million from $210.0 million in the comparable 2012 period. This decrease was mainly attributable to the 2013 commencement of Lidoderm® shipments at zero cost to Watson's wholesaler affiliate under the terms of the Watson Settlement Agreement. In addition, pursuant to the Watson Settlement Agreement, we expect Actavis to launch its lidocaine patch 5%, a generic version of Lidoderm®, on September 15, 2013, negatively impacting future net sales of Lidoderm®.
Opana® ER. Net Sales of Opana® ER for the three months ended March 31, 2013 decreased 31% to $56.3 million from $81.1 million in the comparable 2012 period. In the first half of 2012, after our first quarter supply disruption associated with the shutdown of Novartis's Lincoln, Nebraska manufacturing facility, we transitioned to our formulation of Opana® ER, that is designed to be crush-resistant. While we believe our ongoing commercial efforts, which include direct and indirect sales efforts, coupon programs, education and promotion within targeted customer channels, have contributed positively to the uptake of our crush-resistant formulation, revenues since the transition have not returned to historical pre-transition levels. In addition, Impax launched a generic version of the non-crush resistant formulation Opana® ER on January 2, 2013, negatively impacting first quarter sales. Impax's generic may continue to negatively impact sales in future periods; however, the extent to which our revenues will be affected in future periods is subject to a number of uncertainties including the FDA's determination regarding whether the original formulation of Opana® ER was withdrawn for safety reasons, which we expect will be decided in May 2013, as well as certain other FDA actions that could impact the ability of both branded and generic competition for Opana® ER to enter the market.
In April 2013, the FDA announced that it had determined that the original OxyContin® extended-release tablets marketed by a competitor, which were withdrawn from the market in August 2010 upon the launch of the reformulated OxyContin®, were withdrawn for reasons of safety or effectiveness. The FDA further stated that it would not accept or approve any ANDAs that rely upon the approval of original OxyContin®, precluding the pending generic OxyContin® applicants to come to market. While uncertainty remains with respect to how the FDA will respond to our August 13, 2012 Citizen Petition on Opana® ER, we believe our situation shares many similarities to the original OxyContin®. However, there can be no assurance that a similar determination will be made for Opana® ER. The FDA is expected to respond to this Citizen Petition on May 10, 2013.
Voltaren® Gel. Net Sales of Voltaren® Gel for the three months ended March 31, 2013 totaled $36.1 million. We had no sales of Voltaren® Gel in the comparable 2012 period due to temporary supply constraints resulting from the shutdown of Novartis's Lincoln, Nebraska manufacturing facility. Subject to FDA approval, we believe one or more competing products could potentially enter the market during the second quarter of 2014, negatively impacting future sales of Voltaren® Gel. Percocet®. Net sales of Percocet® for the three months ended March 31, 2013 increased 14% to $26.6 million from $23.4 million in the comparable 2012 period. This increase was primarily attributable to price increases, partially offset by reduced volumes.
Frova®. Net sales of Frova® for the three months ended March 31, 2013 decreased 12% to $13.8 million from $15.6 million in the comparable 2012 period. This decrease was primarily attributable to reduced volumes, partially offset by price increases.


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Supprelin® LA. Net sales of Supprelin® LA for the three months ended March 31, 2013 were consistent with the comparable 2012 period.
Other brands. Net sales of our other branded products for the three months ended March 31, 2013 increased 22% to $24.3 million from $20.0 million in the comparable 2012 period. This increase was primarily attributable to sales growth of Fortesta® Gel.
A discussion of revenues by reportable segment is included below under the caption "Business Segment Results Review".
Gross Margin, Costs and Expenses. The following table sets forth costs and expenses for the three months ended March 31, 2013 and 2012 (dollars in thousands):

                                                             Three Months Ended March 31,
                                                          2013                          2012
                                                    $        % of Revenues        $        % of Revenues
Cost of revenues                               $ 285,926                40   $ 364,820                53
Selling, general and administrative              236,382                33     254,454                37
Research and development                          41,569                 6      88,688                13
Litigation-related and other contingencies        68,232                10           -                 -
Asset impairment charges                           1,100                 -      40,000                 6
Acquisition-related and integration items, net     1,318                 -       3,749                 1
Total costs and expenses*                      $ 634,527                90   $ 751,711               109



* Percentages may not add due to rounding.

Cost of Revenues and Gross Margin. Cost of revenues for the three months ended March 31, 2013 decreased 22% to $285.9 million from $364.8 million in the comparable 2012 period. This decrease was primarily driven by the inclusion in the first quarter of 2012 of a $110.0 million charge related to our Impax Settlement Agreement. This decrease was partially offset by an increase in cost of revenues at Qualitest due to increased demand. Gross profit margins increased to 60% for the three months ended March 31, 2013 compared to 47% in the comparable 2012 period. This increase in gross profit was primarily due to the impact of the previously described charge related to the Impax Settlement Agreement, partially offset by changes in the mix of revenues and the corresponding margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2013 decreased 7% to $236.4 million from $254.5 million in the comparable 2012 period. This decrease was primarily driven by the results of ongoing, company-wide efforts to reduce costs. Cost reductions included Endo Pharmaceuticals' legal expense of approximately $6.0 million and salaries and wages expense of approximately $3.1 million. In addition, AMS severance expense decreased by $9.9 million compared to the prior year.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2013 decreased 53% to $41.6 million from $88.7 million in the comparable 2012 period. This decrease was primarily driven by a decline in expenses related to milestones in the current year quarter. In January 2012, the Company signed a worldwide license and development agreement (the BioDelivery Agreement) with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine. BEMA® Buprenorphine is a transmucosal form of buprenorphine, a partial mu-opiate receptor agonist, which incorporates a bioerodible mucoadhesive (BEMA®) technology. BEMA® Buprenorphine is currently in Phase III trials for the treatment of moderate to severe chronic pain. The Company made an upfront payment to BioDelivery for $30.0 million and incurred $15.0 million of additional costs related to the achievement of certain regulatory milestones during the first quarter of 2012, which were recorded as Research and development expenses.
Litigation-Related and Other Contingencies. Charges for Litigation-related and other contingencies for the three months ended March 31, 2013 totaled $68.2 million with no comparable charges in the comparable 2012 period. The amount for the three months ended March 31, 2013 relates to charges associated with certain of our legal proceedings and other contingent matters as described in more detail in Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q.
Asset Impairment Charges. Asset impairment charges were not material to the Condensed Consolidated Financial Statements during the three months ended March 31, 2013. Asset impairment charges for the three months ended March 31, 2012 relate primarily to impairments of intangible assets, including a $40.0 million charge to write down our Sanctura XR® intangible asset. Further discussion of intangible asset impairment charges is included in Note 8. Goodwill and Other Intangibles of the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q.


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Acquisition-Related and Integration Items, net. Acquisition-related and integration items, net totaled $1.3 million in expense for the three months ended March 31, 2013 compared to $3.7 million in expense in the comparable 2012 period. The decrease is primarily due to lower integration costs on our recent acquisitions.
Interest Expense, net. The components of interest expense, net for the three months ended March 31, 2013 and 2012 are as follows (in thousands):

                         Three Months Ended March 31,
                            2013               2012
Interest expense      $      44,390       $      47,008
Interest income                 (87 )              (112 )
Interest expense, net $      44,303       $      46,896

Interest expense for the three months ended March 31, 2013 totaled $44.4 million compared to $47.0 million in the comparable 2012 period. This decrease was primarily attributable to a decrease in our average total indebtedness from $3.4 billion during the three months ended March 31, 2012 to $3.1 billion during the three months ended March 31, 2013.
Net Loss on Extinguishment of Debt. In February 2012, we made a prepayment of $205.0 million on our Term Loan B Facility. Approximately $5.4 million of the remaining unamortized financing costs associated with this facility was written off in connection with the February 2012 prepayment.
On March 26, 2013, we made an additional prepayment of $100.0 million on our Term Loan B Facility. Approximately $2.2 million of the remaining unamortized financing costs was written off in connection with this prepayment. Also, in March 2013, we amended and restated our Credit Agreement. Upon the closing of 2013 Credit Agreement, related debt issuance costs of $0.5 million and previously deferred debt issuance costs of $8.6 million associated with the 2011 Credit Agreement were charged to expense.
Other (Income) Expense, Net. Other (income) expense, net for the three months ended March 31, 2013 was $18.2 million of income compared to $0.5 million of expense in the comparable 2012 period. Approximately $19.2 million of the income during the three months ended March 31, 2013 was Watson litigation settlement income, net related to the Watson Settlement Agreement. For a complete description of the accounting for the Watson Settlement Agreement, see Note 12. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q. Income Tax. During the three months ended March 31, 2013, we recognized $9.9 million of income tax expense compared to a benefit of $39.3 million in the comparable 2012 period. The effective income tax rate was 27.2% during the three months ended March 31, 2013 compared to 34.5% in the comparable 2012 period. The decrease in the effective tax rate is largely driven by the reinstatement of the research and development tax credit effective January 2013, which resulted in recording a benefit for the estimated 2013 credit as well as the recording of the credit for 2012 in the three-month period ending March 31, 2013. Also contributing to the decrease in the effective tax rate is a reduction in the state tax rate due to law changes and the impact of a current period foreign rate differential for certain of our foreign operations, which had a favorable impact during the three months ended March 31, 2013 compared to an unfavorable impact during the comparable 2012 period. These decreases were partially offset by the impact of certain excess golden parachute payments. During the three months ended March 31, 2012, the effective tax rate benefited from the favorable impact of certain excess golden parachute payments. This benefit did not reoccur during the three months ended March 31, 2013.
Net Income Attributable to Noncontrolling Interests. As a result of our July 2010 acquisition of HealthTronics, Inc., we own interests in various partnerships and limited liability corporations (LLCs) where we, as the general partner or managing member, exercise effective control. Accordingly, we consolidate various entities where we do not own 100% of the entity in accordance with the accounting consolidation principles. Net income attributable to noncontrolling interests relates to the portion of the net income of these partnerships and LLCs not attributable, directly or indirectly, to our ownership interests. Net income attributable to noncontrolling interest totaled $11.3 million in during the three months ended March 31, 2013 and $12.8 million in the comparable 2012 period.
2013 Outlook. We estimate that our 2013 total revenues will be between $2.80 billion and $2.95 billion. This estimate is based on our expectation of growth in Qualitest and AMS offset by a decrease in Endo Pharmaceuticals revenues resulting from the entry of a single generic competitor to Lidoderm®, and by erosion in market share for Opana® ER due to competition from a single, non-AB-rated generic. Cost of revenues as a percent of total revenues is expected to increase when compared to 2012 as a result of the simultaneous growth in lower margin generic pharmaceutical product sales and decline in higher margin branded pharmaceutical sales in 2013. Selling, general and administrative expenses as a percentage of revenues are expected to decline in 2013 relative to 2012 reflecting continuing efficiency improvement efforts and the annualization of the effects of cost reductions initiated in 2012. Research


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and development expenses, excluding upfront and milestone payments, are expected to decrease as we streamline and integrate the R&D functions of our subsidiaries and focus our efforts on key products in development. There can be no assurance that the Company will achieve these results. Business Segment Results Review
The Company has four reportable segments: (1) Endo Pharmaceuticals,
(2) Qualitest, (3) AMS and (4) HealthTronics. These segments reflect the level at which executive management regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of their respective products or services and is discussed in more detail below. We evaluate segment performance based on each segment's adjusted income before income tax, a financial measure not determined in accordance with GAAP. We define adjusted income before income tax as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, net, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, litigation-related and other contingent matters and certain other items that the Company believes do not reflect its core operating performance. Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income before income tax by adding the adjusted income before income tax of each of our reportable segments to Corporate unallocated adjusted income before income tax. We refer to adjusted income before income tax in making operating decisions because we believe it provides meaningful supplemental information regarding the Company's operational performance. For instance, we believe that this measure facilitates its internal comparisons to its historical operating results and comparisons to competitors' results. The Company believes this measure is useful to investors in allowing for greater transparency related to supplemental information used by us in our financial and operational decision-making. In addition, we have historically reported similar financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our financial reporting at this time. Further, we believe that adjusted income before income tax may be useful to investors as we are aware that certain of our significant stockholders utilize adjusted income before income tax to evaluate our financial performance. Finally, adjusted income before income tax is utilized in the calculation of adjusted diluted net income per share, which is used by the Compensation Committee of Endo's Board of Directors in assessing the performance and compensation of substantially all of our employees, including our executive officers. There are limitations to using financial measures such as adjusted income before income tax. Other companies in our industry may define adjusted income before income tax differently than we do. As a result, it may be difficult to use adjusted income before income tax or similarly named adjusted financial measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations, adjusted income before income tax should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. The Company compensates for these limitations by providing reconciliations of our consolidated adjusted income before income tax to our consolidated income before income tax, which is determined in accordance with U.S. GAAP and included in our Condensed Consolidated Statements of Operations. Endo Pharmaceuticals
The Endo Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Voltaren® Gel, Percocet®, Frova®, Supprelin® LA, Vantas®, Valstar® and Fortesta® Gel. Qualitest
The Qualitest segment is composed of our legacy Endo non-branded generics portfolio and the portfolio from Qualitest Pharmaceuticals, which we acquired in 2010. The Qualitest segment has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. With the addition of Qualitest Pharmaceuticals, the segment's product offerings now include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women's health and hypertension markets, among others.
AMS
The AMS segment currently focuses on providing technology solutions to physicians treating men's and women's pelvic health conditions and operates in the following business lines: men's health, women's health, and benign prostatic hyperplasia (BPH) therapy. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our AMS customers or distributors accounted for ten percent or


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more of our total revenues during the three months ended March 31, 2013 or 2012. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.
HealthTronics
The HealthTronics segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services.
Revenues. The following table displays our revenue by reportable segment for the three months ended March 31, 2013 and 2012 (in thousands):

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