Endo International plc
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Endo International plc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded I will now turn the call over to Nina Goworek, Senior Director of Investor Relations.

[Nina Goworek:]

Thank you, Michelle. Good morning and thank you for joining us to discuss our first quarter 2018 financial results. Joining me on today's call are Paul Campanelli, President and CEO of Endo; Blaise Coleman, Executive Vice President and Chief Financial Officer; and Patrick Barry, Executive Vice President and Chief Commercial Officer U.S. Branded Pharmaceuticals. We have prepared a slide presentation to accompany today's webcast, and that presentation as well as other materials are posted online in the Investor section at endo.com. I would like to remind you that any forward-looking statements made by management are covered under the U.S. Private Securities Litigation Reform Act of 1995 and the applicable Canadian securities laws and are subject to the changes, risks, and uncertainties described in today's press release and in our U.S. and Canadian security filings. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's current report on Form 8-K furnished with the SEC for Endo's reasons for including those non-GAAP financial measures in today's earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our earnings press release issued prior to today's call unless otherwise noted therein. I would now like to turn the call over to Paul.

[Paul V. Campanelli:]

Thank you, Nina. Good morning and thank you for joining for us today's call. I hope that you've had a chance to review the company's earnings release that we issued earlier this morning. Let me now turn to our first quarter 2018 earnings presentation beginning on slide 2. Here's a brief agenda for today's call. Moving to slide 3. Endo is very pleased to report another solid quarter of adjusted operating results. Revenue growth in our core areas of focus, XIAFLEX and Sterile Injectables accelerated in the quarter, and our first quarter adjusted results reflect the continued progress we're making against our strategic priority to drive meaningful margin expansion. We are off to a very encouraging start to the year and are affirming our previously provided full-year 2018 revenue, adjusted EBITDA, and adjusted EPS guidance. Blaise will discuss our financial guidance in greater detail later in our presentation. Moving to slide 4, you'll see a snapshot of our segment revenues for the first quarter. The quarter's performance versus the same period last year was primarily attributable to the loss of exclusivity of ezetimibe and quetiapine ER, the annualization of 2017 competitive entries and the product discontinuations in the U.S. Generic Pharmaceuticals segment, the divestitures of Litha and Somar, and the voluntary withdrawal of OPANA ER. This is partly offset by continued strong growth in our U.S. Branded – Sterile Injectables segment as well as continued growth in our U.S. Branded Pharmaceuticals segment, Specialty Products portfolio. Now moving to slide 5, as I just mentioned, our branded Specialty portfolio continued its growth momentum with 7% growth year-over-year. This was largely driven by the strong 15% growth of our XIAFLEX franchise. As I mentioned, branded Established products were impacted by the voluntary withdrawal of OPANA ER and the generic competition amongst several other Established brands. As we've indicated over the last year-and-a-half, we've transitioned our portfolio to focus on our Specialty brands and, most importantly, XIAFLEX and CCH life cycle strategies. Branded direct-to-consumer advertising and disease awareness campaigns for both Peyronie's disease and Dupuytren's contracture continue to yield results as demand for both indications showed strong growth in the quarter. Turning to our CCH cellulite treatment development program, we continue to be pleased with the ramp-up of our two pivotal Phase 3 trials in buttocks, and recruitment for both trials is progressing as planned. We currently expect to share top line results from these Phase 3 trials by the first quarter of 2019. More recently, an encore presentation of our Phase 2b results was presented during the Hot Topics Symposium at the American Society for Aesthetic Plastic Surgery commonly known as ASAPS. Having our data presented at one of the most popular and prestigious sessions of ASAPS demonstrates that there is great interest in the aesthetic community for an innovative injectable treatment for patients with cellulite. We will continue to have a presence at major aesthetics conferences as we advance our cellulite treatment development program and data generation plan. I'm very pleased by the progress we are making with our pre-launch planning efforts as our commercial team prepares for success. Turning to slide 6, our U.S. Branded – Sterile Injectables segment continued its strong momentum in the first quarter growing 25% versus fourth quarter of 2017. This growth was largely driven by ADRENALIN with sales of $30 million in the quarter as unapproved sources began to vacate the market in the second quarter of 2017. Adding to the strong growth was VASOSTRICT, which benefited from some favorable buying patterns in the quarter with sales of $114 million growing 15% year-over-year. Speaking of VASOSTRICT, we are extremely pleased we were able to obtain a preliminary injunction during the first quarter preventing QuVa Pharma from marketing and releasing a compounded version of vasopressin using bulk substance until the conclusion of a trial. A trial date has not yet been set. Additionally, as you are aware, the FDA made public statements in January regarding the bulk compounding of essentially copies of approved drug products under Section 503B of the Federal Food, Drug, and Cosmetic Act. The FDA also issued draft guidance in March on clinical need determinations for purposes of establishing a 503B bulks list. These developments, together with further discussions amongst our and FDA's council, resulted in our agreeing to a temporarily staying our pending litigation against the FDA, which stay has now been extended by the court until September 26, 2018 to provide the FDA additional time to implement its new compounding policy. It is important to note that we retain the ability to lift the stay if we believe an entity has commenced or is likely to commence bulk compounding of vasopressin under the FDA's prior policy, and we intend to seek preliminary injunctive relief. Lastly, as you are aware, we received a Paragraph IV notification on VASOSTRICT on April 17 alleging invalidity and non-infringement with respect to five of our patents. Procedurally, under Hatch-Waxman, we have 45 days to assess the details of the notice letter and, if appropriate, initiate a patent infringement lawsuit. If that occurs, filing a lawsuit triggers an automatic 30-month stay of FDA approval. We intend to vigorously defend our intellectual property. Now on to some recent and exciting news. In late April, we announced we reached a definitive agreements to acquire Somerset Therapeutics and the business of its Indian-based affiliate, Wintac, in an all-cash transaction for approximately $190 million. We believe that this bolt-on acquisition in Sterile Injectables is in line with our strategic priority of building our product portfolio and capabilities for the future and that our strong sales and marketing capabilities will add great value to their eight commercial products. Additionally, we will gain an extensive pipeline of over 40 products along with production and development capabilities that augment our existing Rochester sterile facility. We believe that this acquisition will strengthen and expand our product offerings in the hospital setting, an important step for us in achieving our aspiration of becoming a larger player in the sterile injectables market. We expect the transaction to close towards the end of this year. Separately, we have signed an agreement to become the exclusive distributor of Somerset's glycopyrrolate injection, the generic version of ROBINUL effective May 1. Turning to our U.S. Generic Pharmaceuticals on slide 7. The performance for the segment during the first quarter versus the same period in the prior year reflects the loss of exclusivity of the large first-to-file products ezetimibe and quetiapine ER, which contributed sales of approximately $200 million in first quarter 2017. Also contributing to the performance versus prior year was the annualization of 2017 competitive entries as well as the previously announced product discontinuations. With regard to overall generic retail market conditions, the downward pressures we have previously discussed appear to be stabilizing. We view this trend as positive and believe the hard decisions and actions that we've taken over the last 18 months, in combination with our efforts to build relationships with the re-aligned consortiums, are helping contribute to these developments. We will continue to compete in this dynamic generic retail market by focusing on launching first-to-file, first-to-market retail products along with our emphasis on difficult-to-produce products. On slide 8, let's briefly discuss International Pharmaceuticals. As expected, our international performance reflects the divestitures of Litha and Somar in the second half of 2017. Excluding these divestitures, our international business grew 18% year-over-year. Paladin grew 10% year-over-year, which is better than expected due to new product launches and delayed competition on certain products. We are pleased with Health Canada's approval of XIAFLEX for Peyronie's disease giving us the opportunity to launch this indication. Paladin also recently launched Unisom Snore Relief, the only natural health product throat spray indicated to help relieve symptoms associated with snoring. We are continuing to build our portfolio in Canada with two Sterile Injectable product filings pending approval with Health Canada, one of which could launch this year, and continued business development efforts with the in-licensing of ENVARSUS XR for which we are currently seeking approval in Canada for the prophylaxis of organ rejection in kidney transplant patients. Turning our attention to our scorecard for the year and select disclosure on our pipeline on slide 9. I've already touched on U.S. Branded Pharmaceuticals, U.S. Sterile Injectables, and International Pharmaceuticals with their business results. The U.S. Generics segment launched three new products year-to-date

[Blaise Coleman:]

Thank you, Paul, and good morning, everyone. First, on slide 10, you'll see a snapshot of the first quarter GAAP and non-GAAP financial results. Paul covered company and segment revenues earlier. So, I will not review that again. On a GAAP basis, we had a diluted loss per share of $2.23 from continuing operations in the quarter versus $0.74 in the first quarter of 2017. GAAP net loss from continuing operations in first quarter 2018 was $498 million compared to GAAP net loss from continuing operations of $165 million during the same period in 2017. This is primarily due to the after tax impact of goodwill and intangible asset impairment charges related to the U.S. Generic Pharmaceuticals segment during the first quarter of 2018 as compared to the same period last year. On an adjusted basis, first quarter results were solid. Adjusted operating income of $299 million and adjusted diluted earnings per share from continuing operations of $0.67 exceeded our expectations for the quarter and reflect significantly improved adjusted gross margin and lower adjusted operating expenses versus prior year. The greater than 800 basis point improvement in adjusted gross margin in the first quarter was due to favorable business mix primarily driven by increased revenue growth in Sterile Injectables and branded Specialty Products and benefits from our ongoing cost-efficiency initiatives. Turning to slide 11, in light of our first quarter performance, we are affirming, with increased confidence, our 2018 full-year revenue adjusted EBITDA and adjusted diluted EPS financial guidance. Specifically, we continue to expect revenues to be approximately $2.6 billion to $2.8 billion. We also continue to expect adjusted diluted earnings per share from continuing operations to range between $2.15 and $2.55, and continue to expect adjusted EBITDA from continuing operations to be between $1.2 billion and $1.3 billion. The company's full-year financial guidance is based on the assumptions noted on the slide. In terms of quarterly phasing, we previously communicated we expected total enterprise revenue and adjusted gross margin to be fairly balanced on a quarterly basis over the course of the year. Given the better-than-expected first quarter 2018 revenue and adjusted gross margin, mainly driven by our Sterile Injectables segment due to favorable customer buying patterns on VASOSTRICT, we do expect to see lower total enterprise revenue and adjusted gross margin in the second quarter versus first quarter. We also expect to see higher adjusted operating expenses in the second quarter versus first quarter mainly due to timing of certain legal and development expenses. Lastly, in terms of projected cash flow on slide 12, we had $2 million in cash flow prior to debt payment in first quarter of 2018 and now expect the use of cash prior to debt payment for full-year 2018 to be in the range of approximately $415 million to $315 million reflecting the expected funding of the Somerset Therapeutics and Wintac acquisitions in late 2018. It's important to note that these acquisitions are fully aligned with our stated intent to delever over time. A key enabler to delever is adjusted EBITDA growth. And we believe that this bolt-on acquisition will contribute meaningful adjusted EBITDA growth in the short- to medium-term. As we progress through the year we will continue to evaluate our capital allocation priorities including optional debt paydown. We ended the first quarter of 2018 with $980 million of unrestricted cash, and, at quarter end, our net debt to adjusted EBITDA leverage ratio was approximately 5.1 times. Now, let me turn it back over to Paul. Paul?

[Paul V. Campanelli:]

Thank you, Blaise. We are off to a very encouraging start to the year. I truly believe that the actions we have taken over the last 18 months and the further work we've planned for 2018 will help reposition Endo for long-term success. We will continue to focus on the things that we can control and be relentless in executing on our strategic priorities. Let me now turn the call back over to Nina to manage our question-and-answer period. Nina?

[Nina Goworek:]

Thank you, Paul. In the interest of time, if you can limit your initial questions to allow us to get in as many as possible within the hour, we would appreciate it. Michelle, may we have the first question, please?

[Operator:]

Our first question comes from Ami Fadia of Leerink Partners, your line is open.

[Ami Fadia:]

Good morning. Thanks for taking the question. My question is for Paul, and I wanted to get your thoughts on the Somerset acquisition. What particularly about the asset got you most excited and if you could provide us any visibility into the type of products they have in the pipeline? And does that pipeline help change the cadence of meaningful new product launches over the next year or two? Thank you.

[Paul V. Campanelli:]

Thanks, Ami. Obviously, we're incredibly excited. I think as we've been communicating over the last 18 months, we have a high focus in Sterile Injectables. I think what excites us is the ability to bolster our portfolio and bringing more high-value products that are more challenging to make to the patients. This acquisition is going to infuse us and, in essence, more than double our existing footprint in Injectables. So, when you look at the history of what we've created in less than four years. In essence, we started this journey in 2014 with a $110 million revenue company from JHP. And we've created a nearly $775 million company last year. These are products that have stability. This is an area that we want to continue to grow in. That's why we wanted to acquire a company that has meaningful injectable products. And we have a track record with the former Principal of Wintac, Veerappan Subramanian. We've had a very good track record historically at Par, so known entity, good track record, serial products having longevity, and now we're building our portfolio, so it's something that we're very excited about.

[Nina Goworek:]

Operator, next question, please.

[Operator:]

Our next question comes from Andrew Finkelstein with Susquehanna Financial. Your line is open.

[Andrew Finkelstein:]

Yeah. Good morning and thanks for taking the question. I was hoping you could talk a little bit more about your views on the VASOSTRICT and any updates on the ADRENALIN IP situation. You're still pursuing additional IP, but any comments you can give on the strategy of copying an older formulation and your views on why it'd be inappropriate for FDA to approve a product that had some of the nonclinical characteristics of the older version. And then just on the upcoming product launches, you mentioned an authorized generic product for the 2019 launches, if there's any more detail you can give there.

[Paul V. Campanelli:]

Sure. Thank you, Andrew. I think the starting point on VASOSTRICT, as we've indicated, we have a Paragraph IV that we received on April 17. That said, I think, as you know, we have six Orange Book patents, five tied to the 1 ml. We're very bullish on our intellectual property. When we look at the formulations, our view is that the FDA is going to be focusing on the most current RLD. And that's going to be, I think to us, we view that as a very high barrier to overcome from an approvability standpoint. So I think we look at VASOSTRICT from two different angles

[Andrew Finkelstein:]

Great. Thank you very much.

[Operator:]

Our next question comes from David Buck of B. Riley FBR. Your line is open.

[David George Buck:]

Hi, guys. Thanks for taking the question. Maybe just a follow-up on the last comment, the Colcrys agreement, is that exclusive and no AG during the – after July 1? And maybe for Blaise, can you talk a little bit about what the additional buying may have been in the first quarter for VASOSTRICT and how would you expect the phasing of gross margin going forward and maybe how did some of the divestiture news, including the Wintac deal, affect gross margin for the rest of the year? Thanks.

[Paul V. Campanelli:]

Okay, David, I'll take the AG question. I think the way you should look at that, I would view that as just a typical AG. We will be stepping in the shoes of a company that's already there. So I think it would be limited disruption in normal course, but the way you should look at the deal would be as a standard authorized generic relationship with the brand company. I'll pass it over to Blaise on the financial.

[Blaise Coleman:]

Yeah. Thanks, David. So, just in terms of the VASOSTRICT impact, the favorable buying patterns was about $10 million at the top line. And then as maybe you heard in the prepared remarks in terms of cadence for the rest of the year, from a gross margin standpoint, we will expect to see a decrease in Q2, mainly due to the VASOSTRICT favorable buying patterns. And then as we move through the rest of the year into Q3 and Q4, at this point, we would expect the gross margin to be fairly balanced between those two quarters, so that's sort of the cadence for the rest of the year on the gross margin side.

[David George Buck:]

I guess maybe a follow-up, the divestitures of products including the one to Lannett, any impact that we should be expecting in second half or end of 2019 on gross margin?

[Blaise Coleman:]

No. No, David. They were mainly part of our discontinuation program that we previously announced.

[David George Buck:]

Okay. Thank you.

[Operator:]

Our next question comes from Liav Abraham of Citi. Your line is open.

[Liav Abraham:]

Good morning. Paul, can you talk a little bit more about the dynamics in the U.S. generics market and, in particular, are you seeing any ability to take price on a discrete basis? And then secondly, on your CCH pivotal trial for cellulite, can you make comments on how enrollment is progressing. You've guided to headline data in Q1 2019. However, given the rapid enrollment in the Phase 2 trials, would it be possible to see data in the latter part of 2018? Thanks.

[Paul V. Campanelli:]

Yeah. Sure, Liav. So, in terms of the generic environment, again, I've used this term last quarter and I'll stick with it that we remain cautiously optimistic. And what that really means to me is that we still see erosion, but it's erosion that we've forecasted. And I hate to characterize it like this, but it's not worse than what we've anticipated. So we're starting to see some normal course and some stability. Regarding the CCH enrollment, obviously we're incredibly excited. I'll pass it over to Pat in a second but we're actually pretty excited about bringing forward cellulite. While enrollment may be going a little bit quicker than anticipated, I think for now we'll stay with our top line results for first quarter 2019. Pat, I don't know if you've got anything you want to add.

[Patrick A. Barry:]

No. Paul, I think that's well said. We did see our Phase 2b trial enroll incredibly fast. We think that sort of speaks to the fact that there's a large unmet need here, so that's why we're excited about this development program. We think we're incredibly well positioned to address an unmet need, and we're really excited about having those top line results. And as Paul stated, we're looking at some time during Q1 2019. Anything's possible, of course, but we stand by our statement of Q1 of 2019 to have with our hope of great data. Again, I think why we're excited is to-date, there's not an innovation like this where it's an injectable product that treats the underlying cause of cellulite. That's the fibrous septae. And so we believe that the market is ready for this type of innovation. That's why we stand ready to speak to those results when we're ready.

[Liav Abraham:]

Thank you.

[Operator:]

Our next question comes from Randall Stanicky of RBC. Your line is open.

[Randall S. Stanicky:]

Great. Thanks, Paul. Just looking strategically at the business, you're growing your brand business. You're shrinking the generics business, getting bigger in the hospital and set to add a footprint with the CCH in probably 2020. Can you just comment what percent of your overall business goes through the Big Three consortiums now and where does that go in three years? And then a related question, when you think about the retail generic comments that you made, is that stabilization do you think due to the consortiums now realizing that they've pushed as hard as they can push, or is that more related to the fact that there's been broad-based pruning and just the supply/demand equilibrium's better than it was a year to two ago? Thanks.

[Paul V. Campanelli:]

Yeah. So, Randall, I would say about a third of our revenue goes through the three large wholesalers right now. So it's an incredibly important part of our business, and I want to be clear that we're not walking away from retail. It's just we need to be focused on the areas of growth, right? So the retail segment continues to be an area that is going to be a material contributor for the years to come. But our areas to grow, as we've mentioned, comes from cellulite and from our Sterile business. And hence, the recent acquisition of Somerset Therapeutics. And, Randall, I apologize. Can you just maybe help me with that second question again, if you could repeat it, please?

[Randall S. Stanicky:]

Yeah. Just the comments on the retail generic environment stabilizing. Do you think that's more driven by the Big Three consortiums realizing they've pushed as hard as they can push or is that related more to there's just fewer products out there because there's been so much pruning and pulling back on some of the unprofitable products?

[Paul V. Campanelli:]

Yeah. And I think it's a combination of both and it depends who you're asking too and what the company's motivations are. I mean, I think when you look at the consortiums, there's been enormous pressure placed back on companies that have been forced to make tough decisions on products and in essence may have exposed certain inefficiencies on generic manufacturers. But as a result, you're seeing product discontinuations in that pressure and you're not going to see these products coming back. And I think that will possibly result in certain types of drug shortages on a go-forward basis. There's been an enormous amount of pressure, right? So from that standpoint, that's somewhat concerning. I think when I say stability, I'll kind of speak for the Par portfolio because we made those tough decisions 18 months ago where we discontinued products where we had no meaningful gross margin dollars or weren't even contributing to, say, even plan absorption. So from that standpoint, we already made those tough decisions and I think, ultimately, it's kind of led us to where we are today. And I think a couple of companies have clearly followed suit on further difficult decisions. But I think, ultimately, the pressure started with the consortiums and it exposed certain inefficiencies and making tough decisions. But I think for the near term, we will probably see some normal course erosion as we have Par start to focus on first-to-file and first-to-market products on a go-forward basis.

[Blaise Coleman:]

And, Randall, if I could just add on to Paul's earlier comment on the third of the revenue. The third of the revenue that's going through the three wholesalers is related to generics retail business, just to qualify that a bit.

[Randall S. Stanicky:]

Okay. That's great. Thanks, guys.

[Operator:]

Our next question comes from Elliot Wilbur of Raymond James. Your line is open.

[Elliot Wilbur:]

Thanks. Good morning. Paul, just want to go back to some of your earlier commentary around Somerset. Trying to figure out if this was just sort of a unique opportunity, maybe identified based on a past relationship or whether or not we should, in fact, not be surprised if you continue to make kind of these small tuck-in, bolt-on acquisitions going forward, kind of go back on offense. It certainly seems with kind of the balance sheet limitations that maybe that surprised folks a little bit. But I'm just not sure if that's going to be part of the regular game plan here in the next couple of years. And just quickly in terms of follow-up, if you're thinking about new product expectations for the year, number now 15 to 20, and I know at the beginning of the year, it was around 20, it seems like that's one area where industry is still having a little bit of difficulty in terms of getting a real good line of sight in terms of timelines coming out of FDA. And I'm just wondering if you're thinking that's just more product-specific, company-specific issues or still dealing with an agency that's kind of struggling to really honor its obligations under GDUFA. Thanks.

[Paul V. Campanelli:]

Yeah. Well, maybe I'll start backwards in terms of the qualifier around 15 products, right. So I think right now – and you've characterized it well yourself in some of your reports that you're seeing a lot of approvals but not necessarily first-time approvals. So I think we're seeing some pressures at the FDA focusing on non-paragraph-related first-to-market types of products where there are certain types of delays. So I would say this is the new FDA, and we just need to be prepared for that. We still have a pretty robust portfolio of around 15 products, and as we indicated, we're actually pretty excited about the authorized generic product that we will be launching in July. Regarding the strategy on the Injectable side, I mean I think Blaise has characterized it really well. I mean we are laser-focused on de-levering and debt pay-down. This opportunity is one that we were just following for a very long time. And we're just so excited to be able to expand our Sterile side. And again, at the end of – the way, as Blaise characterized it, again, a way that we can de-lever is to drive EBITDA. So this is a – while it's a small bolt-on acquisition, I would say it's probably more towards a one-off but something that we're very, very excited about. We like to say, in our hands, we're hoping that we can make it better, and I think we've got a history of certain acquisitions at Par over the last seven or eight years that we've been able to create value once we get a hold of it from a technical standpoint and from a sales and marketing standpoint. So we've got a couple of months to go. Stay tuned. But we're really excited about this small injectable company.

[Operator:]

Our next question comes from Louise Chen of Cantor. Your line is open.

[Louise Chen:]

Hi. Thanks for taking my question. So my question was on CCH. Just curious if you could talk about the Phase 2 trial design, what you saw there, and how it differs from the Phase 3 trial design and if there's any positive read-throughs from Phase 2 to Phase 3. Thank you.

[Paul V. Campanelli:]

Yeah. Louise, I'm going to pass that over to Pat Barry. Pat, you can talk a little bit about the Phase 2.

[Patrick A. Barry:]

Sure. I mean the Phase 3 clinical development program is designed based on the success of the Phase 2b results. So, again, it's a composite endpoint both two-point improvement for both patient and physician. So it's a very high watermark that was achieved in Phase 2b, highly statistically significant results. And so it's based on that confidence that we designed the Phase 3 trial. It's focused in on our cellulite severity scales, which is a validated scale. So that was validated in Phase 2b and that's the central part of our Phase 3. And so one of the things we're excited about in Phase 2b was not only the statistically significant results from an efficacy and outcomes perspective, but also from a safety perspective as well. We saw very, very low discontinuation rates. So again, as we go into Phase 3, we go into it with great confidence based on the Phase 2b results.

[Operator:]

Our next question comes from Chris Schott of JPMorgan. Your line is open.

[Christopher Schott:]

Great. Thanks very much. Just a couple of follow-ups here, maybe first on Somerset. What are current Somerset sales from these eight products and how much of an opportunity is there for growth from that currently marketed portfolio in your hands? Any color there would be appreciated. And then when I think about just the Generic business, you commented you're seeing some signs of stability in the broader industry dynamics. You mentioned that we've got launch opportunities, particularly start looking out to second half of, I think you said 2019. I guess at this point, is it reasonable to think about 2018 as a bottom for that Generic business that we can return to growth, or is it too early to be able to make that statement? Thanks very much.

[Paul V. Campanelli:]

Chris, I think it's a bit early. I think a lot of the portfolio that you look at, it ebbs and flows, you've got a lot of Paragraph IVs, you've got settlement negotiations. So we've all been doing this a long time. So it's hard to kind of predict 2018 to 2019 when you're still negotiating certain types of settlement agreements and working with the FDA with respect to getting products out of the FDA. I would tell you right now, as we said before, we feel pretty good about we're able to file about 20 products a year and we're able to launch about, whatever it is, 15 to 20 products a year. That's our normal course. And I think when we look at 2018, it's just more of a year where we have our fair share of approvals. They're just smaller in nature. I think what we said in the last earnings call, we showed on the slide here that we've got our fair share of pretty exciting products in the future with CIPRODEX and DEXILANT and KUVAN, just to name a couple. So, from that standpoint, I think it's more of a timing issue. Regarding the Somerset question on revenue, we really haven't disclosed that yet. Chris, we're going to need a little bit more time. The deal isn't going to close for another five to six months. So I think we're just going to ask for some patience here. What we're excited about is that there's currently eight commercial products and, actually, they just got dexamethasone approved a couple of days ago. This is a company that is very aligned to us on operational execution. They're executors and that's something that excites us. What we can disclose is the IQVIA sales. From a commercial standpoint, they're doing about $28 million according to IQVIA, but that's over a 12-month period. So that's probably as far as we can go today.

[Christopher Schott:]

Thank you.

[Operator:]

Our next question comes from Irina Koffler of Mizuho. Your line is open.

[Irina R. Koffler:]

Hi. Thank you for taking my question. Just in Somerset again, so I noticed in 2018, Endo moved some R&D operations to India. And I was just wondering if you could describe kind of a little bit more about Somerset and where various facilities are, and also if there is an opportunity for additional cost synergies there. Thank you.

[Paul V. Campanelli:]

Yeah. So thanks, Irina. I would say it's a pretty lean operation and a very cost-effective. And so, I don't see a synergy play coming from Somerset. Now, we've made some tough decisions on people here in the U.S. So I think right now, we are on a normal course process. And we're always evaluating people and facilities. That just comes with what we do today, but I think we have done an enormous amount of rightsizing over the last 18 months. With respect to Somerset Therapeutics, the Wintac operation, which is really referring to the manufacture and the R&D center, that's in Bangalore, India. So we're in a very – we're in an exciting city in India. It's very accessible. We have about 15 or 16 acres of property that comes with the acquisition. So it gives us a lot of flexibility as we look at our manufacturing and R&D footprint on a go-forward basis. If we so choose, we have lots of flexibility at the Bangalore facility. Again, we have about five to six months before close. Don't want to get too ahead of ourselves but a lot of optionality.

[Irina R. Koffler:]

Great. Thank you.

[Operator:]

Our next question comes from Dewey Steadman of Canaccord. Your line is open.

[Dewey Steadman:]

Hi. Thanks for taking the question. On CCH, since you've got Pat there, can you just remind us of the opportunity, the commercial opportunity there in terms of sizing relative to XIAFLEX? And then your commitment to commercializing the product and the steps you're taking on that front.

[Paul V. Campanelli:]

Okay. So, Dewey, this is Paul. I'll probably start with the commitment and then I'll pass it over to Pat. I don't think we can be any clearer that we are preparing for success. We are bringing in people not only in the R&D side but we are highly focused on the commercial side of sales and marketing. As Pat indicated earlier and what we said in our script today that we are participating at ASAPS, so we are forging forward. We are 100% committed to the aesthetics indication. I would tell you that there's probably a lot of people here in Malvern on the third or fourth floor right now probably listening into this call. And I will tell you, we are incredibly excited to be locking arms with our colleagues moving forward to becoming an aesthetics company in the future. With that, I'll pass it over to Pat who can talk about the exciting market as we see it today.

[Patrick A. Barry:]

Thanks, Paul. Well, it's a great market and we believe that we're really well-positioned to jump into a market with a large unmet need. Maybe just a few comments on the U.S. market, and again depending on what sources you go to, which society report you go to, they all say it's a large market. It's about a $15 billion market when you look at surgical and nonsurgical. What's really interesting and exciting for us is that you've got a large injectable market, about a $3.5 billion injectable market. That is growing. It grew at about 7% in 2016 and again grew at 5% in 2017. When you look at the area that we're jumping into, when you look at where patients' interests lie, body sculpting is the number one procedure patients are considering. Buttock augmentation within the surgical segment is the second fastest growing procedure. So you've got a lot of positive energy around the space that we're going to be jumping into. When you look at cellulite specifically, 85% to 98% of postpubertal women have the condition of cellulite and we have the opportunity to launch an innovative and injectable. To-date, there's not an injectable that addresses that underlying cause of cellulite, that being the fibrous septae. We have a clinical development program that is designed to prove the hypothesis of CCH lysing that fibrous septae. So we're extremely excited about that. You have a physician community and aesthetic community that is well accepting of injectables. You have an aesthetic patient population that's well accepting of injectables as well. So we're really excited about this opportunity. And as we go out and we speak to our investigators and we go out to the major meetings, as Paul stated, there's a lot of enthusiasm amongst our KOLs, and there's a lot of energy emerging around the opportunity to have an injectable in space. So it's a large U.S. market we're jumping into. We're also excited about the fact that we also have global rights, which provides the potential for additional value to the organization.

[Dewey Steadman:]

Thanks. And with the global rights, would you license this out or would you build a global commercial organization?

[Paul V. Campanelli:]

It's obviously a bit premature but a high probability is that we're focused here in the U.S. I'll probably leave it at that for now.

[Dewey Steadman:]

Okay. Great. Thank you.

[Operator:]

Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

[David A. Amsellem:]

Okay. Thanks. So I just wanted to come back to the Generics pipeline and also inclusive of the acquired pipeline from Somerset. So you've talked about DEXILANT and AFINITOR and CIPRODEX and KUVAN for a long time. Can you just give us a sense of which of these are going to be sole exclusivity or shared exclusivity opportunities or just limited competition in general? And then also around Somerset, maybe help us understand how much of that 25-plus in the pipeline are going to be "limited competition products" and how we should think about that. Thank you.

[Paul V. Campanelli:]

So, David, I'll start with Somerset. I think the way we're looking at Somerset and it's always hard to predict out in the future. But their focus is on areas that are not Paragraph IV-related. So I don't see near-term exclusivities coming from that. What I do see coming out of Somerset is a meaningful pipeline volume with high margin products with sustainability. So that, as we said, augments our existing operation, and that's something that excites us a great deal. With respect to products that have sole exclusivity, have we – I'm not sure we've disclosed which – have we – right. So I think we have settlement agreements in place with certain companies that do not allow us to disclose the terms. So I think, at this point in time, we're going to have to be very cautious about disclosing whether or not we are sole or you can expect an AG with these other companies.

[David A. Amsellem:]

Got it. Okay. Thank you.

[Paul V. Campanelli:]

Okay. You're welcome.

[Operator:]

Our next question comes from Gregg Gilbert of Deutsche Bank. Your line is open.

[Gregg Gilbert:]

Thanks. Good morning. Paul, with injectables becoming a bigger part of your business going forward, can you just briefly describe the differences between the power of the buyers in the injectable space versus that in the retail space? I realize a lot of consolidation occurred there years ago, but curious for you to compare or contrast there and see if the pricing erosion outlook is different there. And then, secondly, on opioids, I know it's really tough to make any predictions here, Paul, but maybe you could point to some of the key mile markers that will eventually allow you to make some real decisions around it, strategically and otherwise. Could those mile markers be this year or are we talking a few years away? Thanks.

[Paul V. Campanelli:]

Sure, Gregg. So, on the opioids, as you rightly stated, we're not going to be able to go into any great detail. It continues to be very early in the process. What we can disclose, which is in the public domain, is that Judge Polster did indicate there's going to be a bellwether trial that's scheduled in Ohio for March of 2019. That to me is going to be a – it will be a meaningful point in time. And that includes, in essence, I believe two counties in Ohio and as well as the City of Cleveland. So, that to me would be a market that we're all going to be watching very closely. With respect to Generics and consortiums on the retail side versus – if I'm understanding the question correctly, Gregg – versus the Sterile side, what excites us is the fact that when you look at – we're still dealing with the same three wholesalers as everybody knows. But in the case of Sterile Injectables, our contracts are negotiated directly with the GPOs. So, again, it's a nuance but it's something that excites us, keeping in mind that we have a sales force that goes out there and works with high-dispensing hospitals and the GPOs to ensure that our contracts are being maintained. So, there's the nuance that with the Injectable business that our sales reps actually can enforce our contracts to make sure that they're being adhered to and being able to work directly with the hospital. On the consortium side, these guys are incredibly important. I mean, these are our partners and they represent tens of thousands of pharmacies. They just have enormous buying and selling pressures, but we've learned to navigate through these rough waters at time, and it's on us. We ultimately are focused on our pipeline regarding tough-to-make Paragraph IVs on the retail side. So, some of the nuances is that, on the Generic consortiums for retail, it's a little bit behind us and we've got to bring technically challenging products forward. And on the hospital side, we've got some control because there's voluntary purchasing with the hospitals working with the GPOs and the ball is a little bit more in our control.

[Gregg Gilbert:]

Thank you.

[Operator:]

Our next question comes from Annabel Samimy of Stifel, your line is open.

[Unknown Speaker:]

Hi, guys. This is Andrew (00

[Paul V. Campanelli:]

Yeah. So, I would start by saying, I think from a products and facilities and a strategy standpoint, we've made our tough decisions. There's not going to be any spin. We've divested products that are not core to us and, in essence, are not profitable to us. There may be a handful of products that remain, but we're all about going forward right now. As I said, our retail business is still very important to us. But when we look towards growth, it's clearly coming on the Sterile side and our branded side focused on XIAFLEX. So, I think that's probably as far as I can really shed some light. I'll pass it over to Blaise regarding debt paydown.

[Blaise Coleman:]

Sure. Yeah, thank you for that. So, as we stated, our strategic priority is to delever back to 3 to 4 times over time. We plan to achieve that through a combination of EBITDA growth as well as reducing net debt reduction. And our three capital allocation priorities hasn't changed, which is investing in our portfolio, investing in complementary small bolt-on acquisitions, and also paying down debt. And, in that context, we're very aware of where our debt is trading at and we're very committed to paying down debt over time. We're ending the first quarter with about $980 million of unrestricted cash on the balance sheet. That's going to go towards funding our remaining mesh liabilities for the year, as well as the funding of the Somerset acquisition. That said, we'll continue to evaluate our capital allocation decisions throughout the year, and that includes optional debt paydown. And we'll provide updates as we move forward on what our plans are on that front.

[Unknown Speaker:]

Thanks.

[Operator:]

Our next question comes from Dana Flanders of Goldman Sachs, your line is open.

[Dana Flanders:]

Hi. Thank you very much for the questions. My first one here, can you just discuss in a little more detail just the XIAFLEX strength you saw this quarter, a very nice 15% growth? How much was driven by Peyronie's versus DC? And then is there anything in either of those underlying markets that just gives you confidence that this level of growth can be sustained? And then my second quick product question, on ADRENALIN, are you still picking up share in that market or has your share stabilized and we should think about growth similar to VASOSTRICT, which is more driven by price at this point? Thank you.

[Paul V. Campanelli:]

Yeah. Dana, hi. It's Paul. I'll take the first question and I'll pass the XIAFLEX question over to Pat. ADRENALIN, I would say it's stabilized, right? I mean, at the end of the day, I think the market has converted. You've got two approved sources with the Par product as well as there is an ampoule on the market that's approved. So, from that standpoint, I think we're in a stable environment. So, all the unapproved sources are long gone, it's passed through the channel and it's really just focused on the two approved sources. And I'll pass it over to Pat on XIAFLEX.

[Patrick A. Barry:]

Yeah. Thanks, Paul. We had another very strong quarter with XIAFLEX. We delivered $57 million in sales. As Paul stated earlier in the call, 15% net sales growth. What we're really excited about is there's underpinning demand growth that's really supporting that. 11% of that growth was volume driven. When we look at the split, both indications are growing. For example, Peyronie's disease indication is growing at 16% year-over-year, so that's really strong demand generation. Dupuytren's contracture, the more mature indication, is also growing, too. It grew at 4%. So, across the board we see really strong growth. We believe that that's sustainable growth. Last year, we made a concerted effort and commitment to invest in a strong sales and marketing effort, and we made a commitment towards consumer activation with digital consumer activation. We're running unbranded television to create disease-state awareness. So, we feel like there's a great opportunity to continue to grow XIAFLEX's online indications. We see strong market penetration for both indications. However, there's untapped potential in terms of diagnosis and treatment. And so, for those reasons, that's why we continue to invest in terms of consumer activation, and we feel like we can continue to have durable growth with our online indications for XIAFLEX.

[Dana Flanders:]

Great. Thank you.

[Operator:]

Our next question comes from Gary Nachman of BMO Capital Markets, your line is open.

[Gary Nachman:]

Hi. Thanks. First, just an update on class action litigation, any new mesh claims that have popped up or anything new on TRT to update us on? And then are you anticipating any other major rounds of discontinuations in Generics going forward? Paul, just remind us what the normal course is for that in your business. Thanks.

[Paul V. Campanelli:]

Yes. So, Gary, I mean, just from a discontinuation standpoint, there's nothing major on a go-forward basis. I think, as I said, the heavy lifting is behind. It's normal course. It's hard. I would say it's a handful of products a year. Normal course. It could be three to six products a year, and, at the same time, you're repopulating at a rate of around maybe 15 or so, 15 to 20. So, that's the way we kind of look at it from a normal course standpoint. And then the question on mesh, to be honest with you, there's really not much to say. And frankly, I'm not spending nearly any time on mesh. And I should probably give you a pretty good indication as to where we are in mesh. And then on the TRT, I think all we can really say at this time is that we're pleased regarding that we've entered into a memo of understanding with respect to the potential settlement. So, I think right now I don't have too much more to say on that as well. So, I think we're really just waiting at this point in time.

[Gary Nachman:]

Okay. All right. Great. Thanks.

[Paul V. Campanelli:]

Okay.

[Operator:]

Our next question comes from Rohit Vanjani of Guggenheim, your line is open.

[Rohit Vanjani:]

Great. Thanks for taking the questions. On the three products you mentioned that were launched, the two first-to-market and one shared first-to-market, can you give any details on the revenue opportunities there or when you might see additional competition? Then secondly, you mentioned testosterone litigation. I thought last quarter you had set aside a reserve of $200 million. I think $100 million was owed to LIDODERM, and then on the cash flow there's the non-mesh settlement payment of $140 million. Could you kind of give any details on what buckets that falls into or is that reflective of testosterone and all? Thanks.

[Paul V. Campanelli:]

Okay. So, maybe Blaise could take the...

[Blaise Coleman:]

Yes. So, that's correct. We had recorded a total legal reserve in the fourth quarter of 2017 for $200 million approximately and $100 million of that does relate to the LIDODERM matter, which is now public debt settlements in the public domain. And also, in terms of cash cadence on the LIDODERM matter, that's also in the public domain. That's about $60 million that we'll be paying in the second quarter. And that is in that line item that you referenced in our cash flow guidance that we provided.

[Paul V. Campanelli:]

And then, Rohit, we're not giving specific revenue results on products. I think what we would say is that memantine ER is about a $1.1 billion brand product before we launch with limited competition. And I think there's two players in that market right now, maybe three players at the most. So, we feel pretty good about that. Praziquantel, we're exclusive. It's about a $10 million branded product, so there's no competition there. And then sodium phenylbutyrate, the brand sales were around $45 million I believe and again we're exclusive. So, you can probably run some math regarding sole exclusivity on those two products.

[Rohit Vanjani:]

Great. Thanks.

[Paul V. Campanelli:]

Okay.

[Operator:]

There are no further questions. I'd like to turn the call back over to Paul Campanelli, President and CEO, for any closing remarks.

[Paul V. Campanelli:]

Thank you very much. We really appreciate your continued interest and support of the company, and we do look forward to providing you with updates as we move forward. Thank you for joining us this morning and we're pleased to report out, in a couple of months, on our second quarter results. Thank you, all.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day