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ENDP > SEC Filings for ENDP > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for ENDO HEALTH SOLUTIONS INC.

Form 10-Q for ENDO HEALTH SOLUTIONS INC.


5-Nov-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 (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 the anatomical pathology services business. On August 9, 2013, HealthTronics, Inc. sold its anatomical pathology services business to Metamark Genetics, Inc. The Company continues to explore strategic alternatives for the remaining HealthTronics businesses.
During the first quarter of 2013, our subsidiary Endo Pharmaceuticals Inc. (EPI) commenced Lidoderm® shipments to the wholesaler affiliate of Watson pursuant to the 2012 Watson Settlement Agreement. Units shipped to Watson's wholesaler affiliate through September 30, 2013 totaled approximately 382,900. EPI's obligation to provide branded product to the wholesaler affiliate of Watson ended on August 31, 2013. On September 16, 2013, Actavis launched its lidocaine patch 5%, its generic version of Lidoderm®.
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 Endo Pharmaceuticals Solutions Inc.'s (EPSI's) product 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 EPSI 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 subsequently submitted a complete response with respect to the NDA for AveedTM. This complete response was accepted for review by the FDA in September 2013. In connection with this acceptance, the FDA assigned Endo's NDA a new Prescription Drug User Fee Act (PDUFA) action date of February 28, 2014.


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On May 10, 2013, the FDA denied EPI's 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 EPI'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 Julie H. McHugh, Chief Operating Officer, would be leaving the Company, effective immediately. Also, on May 29, 2013, we announced that Alan G. Levin, Executive Vice President and Chief Financial Officer, would be leaving the Company in the fall of 2013, subsequent to the appointment of his successor. On September 9, 2013, we announced the appointment of Suketu P. Upadhyay to the position of Executive Vice President and Chief Financial Officer of the Registrant, effective September 23, 2013. Mr. Upadhyay succeeds Mr. Levin, who left the position as Executive Vice President and Chief Financial Officer upon Mr. Upadhyay's start. Prior to joining Endo, Mr. Upadhyay served in various finance leadership roles at Becton, Dickinson, & Company (BD) including, among others, Principal Accounting Officer, Interim Chief Financial Officer and Senior Vice President of Finance and Corporate Controller. Prior to BD, Mr. Upadhyay served in various finance leadership roles at AstraZeneca and Johnson & Johnson.
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 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.
In October 2013, we received a second request for information from the U.S. Federal Trade Commission (FTC) with respect to Generics International (US) Inc.'s (d/b/a Qualitest Pharmaceuticals) purchase of Boca Pharmacal, LLC (Boca). The Company and Qualitest Pharmaceuticals are cooperating, and have been advised by Boca that it too is cooperating, with the government's request. This information request relates to the August 27, 2013 agreement to purchase all of the issued and outstanding membership interests of Boca, a privately held specialty generics company located in Coral Springs, Florida, for $225.0 million in cash, subject to certain adjustments as set forth in the agreement. On November 5, 2013, the Company announced that it had reached a definitive agreement to acquire Paladin Labs Inc. (Paladin Labs) in a stock and cash transaction valued at approximately $1.6 billion. Pursuant to the acquisition, each of Endo and Paladin Labs will be acquired by a newly-formed Irish holding company (New Endo).
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 nine months ended September 30, 2013 decreased 5% to $715.0 million and 2% to $2,190.0 million, respectively, from the comparable 2012 periods. These decreases in revenues were primarily attributable to decreases at our Endo Pharmaceuticals, AMS and HealthTronics segments, partially offset revenue growth from our Qualitest segment.


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The following table displays our revenues by category and as a percentage of total revenues for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):

                           Three Months Ended September 30,                 Nine Months Ended September 30,
                              2013                   2012                    2013                     2012
                           $           %          $          %            $            %           $           %
Lidoderm®            $    149,946        21   $ 238,282        32   $     566,626        26   $   676,302        30
Opana® ER                  59,936         8      62,232         8         174,214         8       236,731        11
Voltaren® Gel              45,044         6      35,483         5         123,937         6        79,173         4
Percocet®                  26,250         4      24,209         3          78,818         4        73,413         3
Frova®                     16,027         2      15,706         2          44,116         2        45,352         2
Fortesta® Gel              15,025         2       8,823         1          47,156         2        21,526         1
Supprelin® LA              14,105         2      14,534         2          44,128         2        42,777         2
Other brands               39,803         6      17,376         2          60,377         3        47,731         2
Total Endo
Pharmaceuticals*          366,136        51     416,645        56   $   1,139,372        52   $ 1,223,005        55
Qualitest                 183,939        26     166,070        22         532,722        24       471,310        21
AMS                       111,244        16     113,304        15         359,867        16       371,601        17
HealthTronics              53,635         8      54,463         7         158,021         7       160,387         7
Total revenues*      $    714,954       100   $ 750,482       100   $   2,189,982       100   $ 2,226,303       100



* Percentages may not add due to rounding.

Lidoderm®. Net sales of Lidoderm® for the three and nine months ended September 30, 2013 decreased 37% to $149.9 million and 16% to $566.6 million, respectively, from the comparable 2012 periods. Net sales were negatively impacted during both the three and nine months ended September 30, 2013 by the September 16, 2013 launch of Actavis's lidocaine patch 5%, a generic version of Lidoderm®. Prior to the launch of Actavis's generic, 2013 net sales were negatively impacted by our obligation under the Watson Settlement Agreement to supply Lidoderm® at zero cost to Watson's wholesaler affiliate from January to August of 2013. Refer to 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 for further discussion of the Watson Settlement Agreement. Although the Company believes it has successfully contracted with certain Managed Care providers and government agencies, we do expect future net sales of Lidoderm® to continue to be impacted due to generic competition, resulting in additional decreases in Lidoderm® net sales.
Opana® ER. Net Sales of Opana® ER for the three and nine months ended September 30, 2013 decreased 4% to $59.9 million and 26% to $174.2 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 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 and Actavis launched generic versions of the non-crush-resistant formulation Opana® ER on January 2, 2013 and September 12, 2013, respectively, negatively impacting revenues.
In late 2012, two patents covering Opana® ER issued to our subsidiary Endo Pharmaceuticals Inc. (EPI). On December 11, 2012, EPI filed a Complaint against Actavis 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 version 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 patent case. On September 12, 2013, the court denied the Company's motions for preliminary injunction. On that day, Actavis launched its generic version of non-crush-resistant Opana® ER 5, 10, 20, 30 and 40 mg tablets. EPI has appealed the denial of a preliminary injunction. 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 manufacturers obtain FDA approval for, and are able to launch, their respective formulations of non-crush-resistant Opana® ER.


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Voltaren® Gel. Net Sales of Voltaren® Gel for the three and nine months ended September 30, 2013 increased 27% to $45.0 million and 57% to $123.9 million, respectively, from the comparable 2012 periods. Due to short-term Voltaren® Gel supply constraints resulting from the temporary shutdown of Novartis's Lincoln, Nebraska manufacturing facility in early 2012, 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 nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, as the 2013 amount included a full period's revenues as compared to a partial period's during the nine months ended September 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 third quarter of 2012, resulting in relatively lower sales during the third quarter of 2012. The increase for the three months ended September 30, 2013 from the comparable 2012 period resulted from sales returning to more normal levels. 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 nine months ended September 30, 2013 increased 8% to $26.3 million and 7% to $78.8 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 nine months ended September 30, 2013 increased 2% to $16.0 million and decreased 3% to $44.1 million, respectively, from the comparable 2012 periods. The increase during the three months ended September 30, 2013 was primarily attributable to increased price, partially offset by reduced volume. The decrease during the nine months ended September 30, 2013 was primarily attributable to reduced volume, partially offset by increased price.
Fortesta® Gel. Net sales of Fortesta® Gel for the three and nine months ended September 30, 2013 increased 70% to $15.0 million and 119% to $47.2 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 nine months ended September 30, 2013 decreased 3% to $14.1 million and increased 3% to $44.1 million, respectively, from the comparable 2012 periods. The decrease during the three months ended September 30, 2013 was primarily attributable to decreased price. The increase during the nine months ended September 30, 2013 was primarily attributable to increased volume.
Other brands. Net sales of EPI's other branded products for the three and nine months ended September 30, 2013 increased 129% to $39.8 million and 26% to $60.4 million, respectively, from the comparable 2012 periods. These increases were primarily attributable to the increase in royalty income from Actavis, under the terms of the Watson Settlement Agreement, based on Actavis's gross profit generated on sales of its generic version of Lidoderm®, which commenced on September 16, 2013. This increase was partially offset by decreased sales of Valstar® and Vantas®, Refer to 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 for further discussion of the Watson Settlement Agreement.
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 and nine months ended September 30, 2013 and 2012 (dollars in thousands):

                                    Three Months Ended September 30,                             Nine Months Ended September 30,
                                   2013                         2012                           2013                           2012
                             $        % of Revenue        $        % of Revenue          $         % of Revenue         $         % of Revenue
Cost of revenues        $ 287,970               40   $ 294,267           39        $   883,063               40   $   953,657               43
Selling, general and
administrative            199,719               28     210,446           28            689,436               31       698,522               31
Research and
development                38,080                5      48,952            7            113,740                5       183,067                8
Patent litigation
settlement, net                 -                -     (46,238 )         (6 )                -                -        85,123                4
Litigation-related and
other contingencies        30,895                4      82,600           11            159,098                7        82,600                4
Asset impairment
charges                    38,807                5      11,163            1             46,994                2        54,163                2
Acquisition-related and
integration items, net      2,207                -       5,776            1              6,165                -        16,580                1
Total costs and
expenses*               $ 597,678               84   $ 606,966           81        $ 1,898,496               87   $ 2,073,712               93



* Percentages may not add due to rounding.


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Cost of Revenues and Gross Margin. Cost of revenues for the three and nine months ended September 30, 2013 decreased 2% to $288.0 million and 7% to $883.1 million, respectively, from the comparable 2012 periods. The decrease during the three months ended September 30, 2013 was primarily attributable to a decrease in cost of revenues at Endo Pharmaceuticals due to decreased demand for Lidoderm® and the related decrease in Lidoderm® related royalty payments to Teikoku. This decrease was partially offset by an increase in cost of revenues at Qualitest due to increased demand for certain existing products and new products launched in the second half of 2012 and first quarter of 2013. The decrease during the nine months ended September 30, 2013 was primarily attributable to the inclusion, during the nine months ended September 30, 2012, of a $104.0 million charge related to our Impax Settlement Agreement which did not reoccur during the nine months ended September 30, 2013. Also contributing to this decrease was a reduction in cost of revenues at Endo Pharmaceuticals due to decreased demand for Lidoderm® and the related decrease in Lidoderm® related royalty payments to Teikoku. These decreases were partially offset by an increase in cost of revenues at Qualitest due to increased demand for certain existing products and new products launched in the second half of 2012 and first quarter of 2013. Gross margins for the three months ended September 30, 2013 decreased to 60% from 61% in the comparable 2012 period, due primarily to a decrease in revenues from our higher margin Endo Pharmaceuticals segment. Gross margins for the nine months ended September 30, 2013 increased to 60% from 57% 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 nine months ended September 30, 2013 decreased 5% to $199.7 million and 1% to $689.4 million, respectively, from the comparable 2012 periods. These decreases were primarily attributable to cost savings resulting from ongoing cost reduction initiatives including, among others, the June 2013 restructuring and were partially offset by severance and other restructuring charges recorded as part of these initiatives. Research and Development Expenses. Research and development expenses for the three and nine months ended September 30, 2013 decreased 22% to $38.1 million and 38% to $113.7 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. Additionally, the decrease during the nine months ended September 30, 2013 reflects a decline in milestone-related expenses. In January 2012, EPI 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. EPI 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. Similar expenses were not material in 2013.
Patent litigation settlement, net. Amounts related to Patent litigation settlement, net for the three and nine months ended September 30, 2012 totaled $46.2 million of income and $85.1 million of expense, with no comparable amounts during the three and nine months ended September 30, 2013. These amounts relate to the initial establishment of and subsequent change in estimate for 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 nine months ended September 30, 2013 totaled $30.9 million and $159.1 million, respectively, compared to $82.6 million during both the three and nine months ended September 30, 2012. These amounts relate to charges associated with certain of the legal proceedings and other contingent matters that are 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. Additionally, during the third quarter of 2012, we recorded charges totaling $29.6 million for certain previously disclosed pricing litigation matters. For further description of these pricing litigation matters, refer to our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 1, 2013. . . .

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