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ENDP > SEC Filings for ENDP > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for ENDO HEALTH SOLUTIONS INC.


6-Aug-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.


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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 (the Board) effective March 18, 2013. Prior to joining Endo, Mr. De Silva served as the President of Valeant Pharmaceuticals International, Inc. and served as its Chief Operating Officer. Prior to joining Valeant in 2009, Mr. De Silva held various leadership positions with Novartis AG. 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. Upon the completion of this assessment in June 2013, the Company outlined strategic, operational and organizational steps it is taking to refocus the Company and enhance shareholder value. These actions are the result of a comprehensive assessment of Endo's strengths and challenges, its cost structure and execution capabilities, and its most promising opportunities to drive future cash flow and earnings growth. Specifically, the Company announced plans to reduce annual operating expenses in 2013 and beyond, explore strategic alternatives for its HealthTronics business and branded pharmaceutical discovery platform, enhance organic growth drivers across business lines through more effective execution, pursue accretive acquisitions within a disciplined capital allocation framework and attract, retain and develop talent across the organization within the context of a lean operating model. The cost reduction initiatives include a reduction in headcount of approximately 15% worldwide, streamlining of general and administrative expenses, optimizations related to commercial spend and a refocusing of research and development efforts. Additionally, in June 2013, the Board approved a plan to sell its anatomical pathology services business. The business is being actively marketed and the Company expects it to be sold within one year of the Board's approval.
During the first quarter of 2013, we commenced Lidoderm® shipments to the wholesaler affiliate of Watson pursuant to the 2012 Watson Settlement Agreement. Units shipped to Watson's wholesaler affiliate through June 30, 2013 totaled approximately 290,600.
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. 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 testosterone replacement therapy for men diagnosed with 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. In May 2013, the FDA issued a complete response letter regarding the new drug application (NDA) for AveedTM. The complete response letter did not include requests for additional clinical studies. The FDA outlined the steps necessary to support approval of the NDA and updated the requirement for a Risk Evaluation and Mitigation Strategy (REMS). Specifically, the FDA requested that the REMS include a Medication Guide as well as Elements to Assure Safe Use (ETASU) to mitigate the risks and severe complications related to post-injection reactions. The Company intends to submit a complete response by the end of the third quarter of 2013.
On May 10, 2013, the FDA denied our August 13, 2012 Citizen Petition requesting that the FDA (1) determine that the discontinued, non-crush-resistant version of Opana® ER approved under NDA 21-610 was discontinued for safety and can no longer serve as a Reference List Drug (RLD) for an ANDA or generic applicant;
(2) refuse to approve any pending ANDA for a generic version of the non-crush-resistant version of Opana® ER approved under NDA 21-610; and (3) suspend and withdraw the approval of any ANDA referencing Opana® ER approved under NDA 21-610 as the RLD. The FDA decided that the original formulation of Opana® ER was not withdrawn from sale for reasons of safety or effectiveness. As a result, generic versions of the original formulation referencing NDA 21-610 may be approved as long as they meet all other legal and regulatory requirements for approval and the FDA will not begin procedures to suspend or withdraw approval of ANDAs that reference NDA 21-610. Additionally, the FDA issued a completed response letter to Endo's supplemental new drug application requesting the addition of labeling language describing the abuse deterrent properties of Opana® ER. On May 29, 2013, we announced that Alan G. Levin, Executive Vice President and Chief Financial Officer, and Julie H. McHugh, Chief Operating Officer, would be leaving the Company. Mr. Levin will continue to serve in his present position until the fall of 2013 while a search is conducted for his successor. Ms. McHugh's departure was effective as of May 29, 2013. On July 22, 2013, Endo announced the appointment of Don DeGolyer as Chief Operating Officer, Pharmaceuticals, which includes our Endo Pharmaceuticals and Qualitest segments, effective August 1, 2013. Prior to joining Endo, Mr. DeGolyer served as President & CEO of Sandoz Inc., Novartis' North America generic products division. Prior to joining Novartis in 2002, he


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spent eleven years at Johnson & Johnson in pharmaceutical commercial roles, including the positions of Vice President of Marketing and Sales of the Ortho Dermatological business and Vice President of Managed Care.
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 and six months ended June 30, 2013 decreased 2% to $766.5 million and less than 1% to $1,475.0 million, respectively, from the comparable 2012 periods. These decreases in revenues were primarily attributable to revenue growth from our Qualitest segment, partially offset by revenue decreases at our Endo Pharmaceuticals, AMS and HealthTronics segments. The following table displays our revenues by category and as a percentage of total revenues for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

                             Three Months Ended June 30,                     Six Months Ended June 30,
                             2013                   2012                   2013                    2012
                          $           %          $          %           $           %           $           %
Lidoderm®            $   229,656        30   $ 228,006        29   $   416,680        28   $   438,020        30
Opana® ER                 57,951         8      93,413        12       114,278         8       174,499        12
Voltaren® Gel             42,783         6      43,690         6        78,893         5        43,690         3
Percocet®                 25,950         3      25,824         3        52,568         4        49,204         3
Frova®                    14,312         2      14,002         2        28,089         2        29,646         2
Fortesta® Gel             17,477         2       6,881         1        32,131         2        12,703         1
Supprelin® LA             16,597         2      14,797         2        30,023         2        28,243         2
Other brands              10,921         1      16,173         2        20,574         1        30,355         2
Total Endo
Pharmaceuticals*         415,647        54     442,786        56   $   773,236        52   $   806,360        55
Qualitest                170,530        22     159,895        20       348,783        24       305,240        21
AMS                      125,971        16     128,131        16       248,623        17       258,297        18
HealthTronics             54,361         7      54,376         7       104,386         7       105,924         7
Total revenues*      $   766,509       100   $ 785,188       100   $ 1,475,028       100   $ 1,475,821       100



* Percentages may not add due to rounding.

Lidoderm®. Net sales of Lidoderm® for the three and six months ended June 30, 2013 increased 1% to $229.7 million and decreased 5% to $416.7 million, respectively, from the comparable 2012 periods. Net sales were negatively impacted during both the three and six months ended June 30, 2013 by the 2013 commencement of Lidoderm® shipments at zero cost to Watson's wholesaler affiliate under the terms of the Watson Settlement Agreement. During the three months ended June 30, 2013, the unfavorable impact of these shipments was more than offset by the favorable impact of price increases. 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®. Upon Actavis's launch, we also expect to begin recording royalty income from Actavis based on its gross profit generated on sales of its generic version of Lidoderm® during its period of exclusivity. Refer to Note 12. Commitments and Contingencies for further discussion of the Watson Settlement Agreement.
Opana® ER. Net Sales of Opana® ER for the three and six months ended June 30, 2013 decreased 38% to $58.0 million and 35% to $114.3 million, respectively, from the comparable 2012 periods. 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. 2012 revenues included


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the favorable effects of wholesaler restocking efforts to transition to the crush-resistant formulation of Opana® ER, which did not reoccur during the comparable 2013 periods. In addition, Impax launched a generic version of the non-crush-resistant formulation Opana® ER on January 2, 2013, negatively impacting revenues.
In late 2012, two patents issued to EPI covering Opana® ER. On December 11, 2012, Endo Pharmaceuticals Inc. (EPI) filed a Complaint against Actavis SA in U.S. District Court for the Southern District of New York for patent infringement based on its ANDA for a non-crush-resistant generic of Opana® ER. Between May 22 and June 21, 2013, EPI filed similar suits in the U.S. District Court for the Southern District of New York against the following applicants for non-crush-resistant Opana® ER: Par Pharmaceuticals, Teva Pharmaceuticals, Mallinckrodt LLC, Sandoz Inc., Roxane Laboratories, and Ranbaxy. In July 2013, Actavis and Roxane were granted FDA approval to market all strengths of their respective non-crush-resistant formulations of Opana® ER. On August 1, 2013, EPI dismissed its suit against Teva Pharmaceuticals based on its demonstration to EPI that it does not, at this time, intend to pursue an ANDA for non-crush-resistant Opana® ER. On August 6, 2013, EPI filed motions for preliminary injunctions against Actavis and Roxane requesting the court enjoin Actavis and Roxane from launching additional Opana® ER generics pending the outcome of the case. If these lawsuits are unsuccessful and we are unable to defend our non-crush-resistant formulation of Opana® ER from one or more additional generic competitors, our revenues could decline further to the extent additional manufactures obtain FDA approval for, and are able to launch, their respective formulations of non-crush-resistant Opana® ER.
Voltaren® Gel. Net Sales of Voltaren® Gel for the three and six months ended June 30, 2013 totaled $42.8 million and $78.9 million, respectively. This compared to $43.7 million during both the three and six months ended June 30, 2012. Due to short-term Voltaren® Gel supply constraints resulting from the temporary shutdown of Novartis's Lincoln, Nebraska manufacturing facility, there were no sales of Voltaren® Gel during the three months ended March 31, 2012. In April 2012, production and sale of Voltaren® Gel resumed, resulting in relatively higher revenues for the six months ended June 30, 2013 compared to the six months ended June 30, 2012, as the 2013 amount included a full period's revenues as compared to a partial period's during the six months ended June 30, 2012. As a result of the first quarter 2012 supply constraints, sales during the second quarter of 2012 included the favorable effects of wholesaler restocking efforts, which did not reoccur during the second quarter of 2013, resulting in a small sales decrease for the three months ended June 30, 2013 from the comparable 2012 period. 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 and six months ended June 30, 2013 increased less than 1% to $26.0 million and 7% to $52.6 million, respectively, from the comparable 2012 periods. These increases were primarily attributable to price increases, partially offset by reduced volumes. Frova®. Net sales of Frova® for the three and six months ended June 30, 2013 increased 2% to $14.3 million and decreased 5% to $28.1 million, respectively, from the comparable 2012 periods. The increase during the three months ended June 30, 2013 was primarily attributable to increased price, partially offset by reduced volume. The decrease during the six months ended June 30, 2013 was primarily attributable to reduced volume, partially offset by increased prices. Fortesta® Gel. Net sales of Fortesta® Gel for the three and six months ended June 30, 2013 increased 154% to $17.5 million and 153% to $32.1 million, respectively, from the comparable 2012 periods. These increases were primarily attributable to increased volumes resulting from improved formulary access to this product.
Supprelin® LA. Net sales of Supprelin® LA for the three and six months ended June 30, 2013 increased 12% to $16.6 million and 6% to $30.0 million, respectively, from the comparable 2012 periods. These increases were primarily attributable to increases to both price and volume.
Other brands. Net sales of our other branded products for the three and six months ended June 30, 2013 decreased 32% to $10.9 million and 32% to $20.6 million, respectively, from the comparable 2012 periods. These decreases were primarily attributable to decreased royalty revenue and decreased sales of Valstar® and Vantas®.
A discussion of revenues by reportable segment is included below under the caption "Business Segment Results Review".


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Gross Margin, Costs and Expenses. The following table sets forth costs and expenses for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

                                     Three Months Ended June 30,                                  Six Months Ended June 30,
                                  2013                         2012                          2013                           2012
                            $        % of Revenue        $        % of Revenue         $         % of Revenue         $         % of Revenue
Cost of revenues       $ 309,167               40   $ 294,570               38   $   595,093               40   $   659,390               45
Selling, general and
administrative           253,335               33     233,622               30       489,717               33       488,076               33
Research and
development               34,091                4      45,427                6        75,660                5       134,115                9
Patent litigation
settlement, net                -                -     131,361               17             -                -       131,361                9
Litigation-related and
other contingencies       59,971                8           -                -       128,203                9             -                -
Asset impairment
charges                    7,087                1       3,000                -         8,187                1        43,000                3
Acquisition-related
and integration items,
net                        2,640                -       7,055                1         3,958                -        10,804                1
Total costs and
expenses*              $ 666,291               87   $ 715,035               91   $ 1,300,818               88   $ 1,466,746               99



* Percentages may not add due to rounding.

Cost of Revenues and Gross Margin. Cost of revenues for the three and six months ended June 30, 2013 increased 5% to $309.2 million and decreased 10% to $595.1 million, respectively, from the comparable 2012 periods. The increase during the three months ended June 30, 2013 was primarily attributable to an increase in cost of revenues at Qualitest due to increased demand and the presence of certain favorable items in 2012 which did not reoccur in 2013. The decrease during the six months ended June 30, 2013 was primarily attributable to the inclusion in the first quarter of 2012 of a $110.0 million charge related to our Impax Settlement Agreement which did not reoccur during the six months ended June 30, 2013. This decrease was partially offset by an increase in cost of revenues at Qualitest due to increased demand and the presence of certain favorable items in 2012 which did not reoccur in 2013. Gross profit margins for the three months ended June 30, 2013 decreased to 60% from 62% in the comparable 2012 period, due primarily to growth in lower margin generic pharmaceutical product sales and a decline in higher margin branded pharmaceutical sales. Gross profit margins for the six months ended June 30, 2013 increased to 60% from 55% in the comparable 2012 period, due primarily to the previously described charge related to the Impax Settlement Agreement, partially offset by growth in lower margin generic pharmaceutical product sales and a decline in higher margin branded pharmaceutical sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and six months ended June 30, 2013 increased 8% to $253.3 million and less than 1% to $489.7 million, respectively, from the comparable 2012 periods. These increases were primarily attributable to severance and other restructuring charges recorded in connection with our June 2013 restructuring, partially offset by cost reductions resulting from ongoing cost reduction initiatives including, among others, the June 2013 restructuring. Research and Development Expenses. Research and development expenses for the three and six months ended June 30, 2013 decreased 25% to $34.1 million and 44% to $75.7 million, respectively, from the comparable 2012 periods. These decreases reflect the company-wide refocusing of our research and development efforts being undertaken as part of the Company's broader strategic, operational and organizational steps announced in June 2013 intended to refocus the Company and enhance shareholder value. Additionally, the decrease during the six months ended June 30, 2013 reflects a decline in expenses related to milestones. 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.
Patent litigation settlement, net. Charges related to Patent litigation settlement, net for the three and six months ended June 30, 2012 totaled $131.4 million with no charges in the comparable 2013 periods. These charges relate to the establishment of the liability related to the Watson Settlement Agreement 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.
Litigation-Related and Other Contingencies. Charges for Litigation-related and other contingencies for the three and six months ended June 30, 2013 totaled $60.0 million and $128.2 million, respectively, with no charges in the comparable 2012 periods. The


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amounts for the three and six months ended June 30, 2013 relate 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 for the three and six months ended June 30, 2013 totaled $7.1 million and $8.2 million, respectively, compared to $3.0 million and $43.0 million, respectively, in the comparable 2012 periods. The amounts incurred during the three and six months ended June 30, 2013 related primarily to assets written down in connection with the Company's cost reduction initiatives. These impairment charges are further discussed in Note 3. Fair Value Measurements and 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. Asset impairment charges for the three and six months ended June 30, 2012 related to writing down our Sanctura XR® and AMS IPR&D intangible assets. 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.
As previously disclosed, the Company performed its 2012 annual goodwill and indefinite-lived intangible asset impairment testing as of October 1, 2012. In connection with this testing, we recorded certain asset impairment charges including, among others, an impairment to our AMS reporting unit's goodwill of $507.5 million. This AMS impairment charge was largely the result of a reduction to projected revenue growth and profitability levels, which were identified as part of our fourth quarter 2012 strategic planning and budgeting processes and resulted from various challenges our AMS business faced in 2012. Since October 1, 2012, the AMS business has faced continued challenges reflecting on-going industry shifts following the FDA's September 2011 advisory committee regarding the use of surgical mesh in pelvic organ prolapse, resulting in revenues and profitability levels below the projections contemplated in connection with our 2012 annual impairment testing. In response to these challenges and in an effort to offset continued declines in revenues and profitability levels, the Company has recently decided, as part of the broader strategic, operational and organizational actions announced in June 2013, to take certain actions to reduce AMS's operating expenses. We began to implement these actions in June 2013. As a result of our projected cost savings from these initiatives, we believe that we will maintain consistent profitability levels forecasted at the time of our 2012 annual impairment test. The Company also recognizes the rise in the risk-free rate of return since the date of our last assessment and the potential impact on the discount rate utilized in our 2012 AMS annual impairment test. We consider the discount rate to be one of the more sensitive assumptions utilized in our annual impairment test. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, for example, a 50 basis point increase in the assumed discount rate would have resulted in an increased goodwill impairment which would be material to our consolidated financial statements. Based on current market conditions, we do not believe a change in the discount rate previously utilized to value the business would be appropriate at this time; we will continue to monitor all the AMS reporting unit's sensitive assumptions during the third quarter of 2013 and in our annual goodwill impairment test that will occur on October 1, 2013. Based upon our consideration of these events and circumstances, we concluded that it was more likely than not that the fair value of our AMS reporting unit exceeds its carrying amount, and thus, no further impairment analysis was performed. On an ongoing basis, we evaluate potential triggering events that may affect the estimated fair value of . . .

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