Endo International plc
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Endo International Second Quarter 2018 Financial Results 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 follow at that time. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Nina Goworek, Senior Director, Investor Relations. Please go ahead.

[Nina Goworek:]

Thank you, George. Good morning and thank you for joining us to discuss our second quarter 2018 financial results. Joining me on today's call are Paul Campanelli, President and CEO of Endo; and Blaise Coleman, Executive Vice President and CFO. We have prepared a slide presentation to accompany today's webcast and that presentation as well as other materials are posted online in the Investors 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 securities 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 today 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 us for today's call. I hope you've had a chance to review the company's earnings release issued earlier this morning. Let's turn our attention to the second quarter 2018 earnings presentation. Beginning on slide 2, here's a brief agenda for today's call. Moving to slide 3, Endo is extremely pleased to report another strong quarter of adjusted operating results. Revenues for XIAFLEX and our Sterile Injectables segment continue their double-digit growth momentum. Our second quarter performance also reflect adjusted gross margin expansion, driven primarily by favorable product mix as we continue to focus our efforts on driving growth in higher margin areas of our business. In addition, we continue to deliver increased efficiencies across our business, contributing to both our adjusted gross margin and adjusted EBITDA margin expansion in the second quarter of 2018. Based on these results, we are very happy to report that we are raising our full year revenue, adjusted EBITDA and adjusted diluted EPS financial guidance. Blaise will walk you through our updated financial guidance in greater detail later in our presentation. Moving to slide 4, you'll see a snapshot of our segment revenues for the second quarter. From a total enterprise perspective, the quarter's performance versus the same period last year was primarily attributable to the loss of exclusivity of ezetimibe, the annualization of 2017 competitive entries, product discontinuations in the U.S. Generic Pharmaceuticals segment, the divestitures of Litha and Somar, and our voluntary market withdrawal of OPANA ER. These factors were partly offset by continued strong growth in our U.S. Branded Sterile Injectables segment as well as our continued growth in the Specialty Products portfolio of our U.S. Branded – Specialty & Established Pharmaceuticals segment. That said, on a sequential basis, total enterprise revenues increased 2% from $701 million in the first quarter of this year to approximately $715 million in the second quarter of this year. Now, moving to slide 5. Our Branded Specialty portfolio continued to advance with growth of 9% year-over-year. This is largely driven by the significant growth of our XIAFLEX franchise, which grew 27% in the second quarter versus the second quarter of 2017. Sequentially, XIAFLEX also grew at a double-digit rate, up 11% versus the first quarter of 2018. SUPPRELIN LA's second quarter sales were essentially flat with first quarter of 2018; however, second quarter sales represented a decline versus prior year. This change is reflective of the second quarter 2017 SUPPRELIN LA sales, representing the highest quarter of sales ever, partly driven by favorable reserve true up. In addition, we have seen increased competition for new patient starts. We intend to increase our commercial initiatives through the year and support SUPPRELIN LA's highly-differentiated product profile with a long history of providing significant benefits to patients. Branded Established Products were mainly impacted by the voluntary market withdrawal of OPANA ER, the discontinuation of SUMAVEL DosePro in this first quarter of 2018, and generic competition. That said, I'm extremely proud of what our Branded Commercial team has been able to achieve. Our key product franchise, XIAFLEX, grew an outstanding 27% year-over-year, fueled mainly by strong demand growth driven by our flawless execution and continued investment in our integrated commercial strategy. Based on robust June year-to-date XIAFLEX revenue growth, we now expect XIAFLEX full year revenue growth to be in the high-teens percentage range versus our previous guidance of low- to mid-teens growth. Moving on to our CCH, cellulite treatment development program, we were pleased with the recruitment of our two pivotal Phase 3 trials. Recruitment accelerated faster than expected and we currently plan to share top line results from these trials in the fourth quarter of this year. This is a great accomplishment by our clinical development team and I couldn't be more proud. Our presence at recent and future aesthetic conferences provide a platform for us to credential the company in aesthetics and to showcase the encore Phase 2b data to key plastic surgeons and cosmetic dermatologists. In April, the encore Phase 2 data was presented during Hot Topics at the American Society for Aesthetic Plastic Surgery's annual meeting. In June, the data was presented again at the Vegas Cosmetic Surgery symposium, a premiere aesthetic multi-specialty meeting. We look forward to communicating our Phase 3 top line results to you in the fourth quarter, while continuing our pre-launch efforts. Turning to slide 6. Our U.S. Branded Sterile Injectables segment continues to deliver with sales growth of 21% in the second quarter of 2018 versus the second quarter of 2017. This growth was largely driven by ADRENALIN with sales of $37 million in the quarter, a 93% increase versus the same period in 2017, as unapproved sources began to vacate the market in May 2017. Adding to the strong growth was VASOSTRICT and other sterile products. VASOSTRICT grew 11% year-over-year with quarterly sales of $106 million. While other Sterile Injectables grew 14% year-over-year, mainly driven by ephedrine sulfate in addition to glycopyrrolate, for which we are Somerset Therapeutics' exclusive distributor. Adding to our portfolio, in late July we launched ertapenem for injection, the authorized generic of Merck's INVANZ, which had IQVIA brand sales of approximately $390 million for the 12 months ending May 31, 2018. Based on our strong year-to-date results and the launch of ertapenem for injection, we now project full year U.S. Branded Sterile Injectables revenues to grow in the high-teens percentage range. The continued strong performance of our Sterile Injectables business further validates our strategic decision to increase investments in this segment. Further on Sterile Injectables, in the second quarter of 2018, Endo entered into an exclusive licensing agreement with Nevakar for the development of five differentiated 505(b)(2) sterile injectable products in the U.S. and Canada. Nevakar will develop and bring these products through the regulatory process to seek FDA approval and our U.S. Branded Sterile Injectables business intends to launch and commercialize these products upon approval. We're also very excited to further enhance our Sterile Injectables portfolio with products that will benefit patients by providing new treatments in the hospital in the critical care environment. We expect that this deal, in addition to the previously announced Somerset Therapeutics acquisition, will further bolster our U.S. Branded Sterile Injectables portfolio for today and in the future. Speaking of Somerset Therapeutics, the acquisition remains on track to close by the end of 2018. We continue to be enthusiastic about the acquisition, but we look forward to integrating Somerset and Wintac into the company. We've been very pleased with our continued regulatory execution. Since we announced the acquisition in April, Somerset has been able to attain six additional FDA approvals, demonstrating the near- to medium-term opportunities we'd previously discussed. Now turning to our U.S. Generic Pharmaceuticals on slide 7. The performance for this segment during the second quarter versus the same period in the prior year, reflects the loss of exclusivity of ezetimibe, the annualization of 2017 competitive entries, as well as previously announced product discontinuation including the authorized generic of metoprolol. First half performance was better than expected primarily due to the shared first-to-market launch of memantine ER capsules as well as the late competition on certain products in which we enjoyed limited or no competition. More recently, on July 1 we were excited to launch colchicine tablets, the authorized generic of COLCRYS which was the result of a Paragraph IV settlement agreement. The launch is off to a great start. Now with regard to overall generic retail market conditions. We continue to be encouraged that the downward pressures we've experienced over the past few years appear to be stabilizing. We've seen promising early signals and remain cautiously optimistic. We are excited about our pipeline, our product selection process and the progress we've made today to reshape our portfolio for the future. 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. Second quarter international results include approximately $10 million of x-U.S. XIAFLEX sales which were originally expected in the third quarter. Paladin grew 6% year-over-year which is better than expected due to better performance of our promoted business, particularly Monurol and XIAFLEX, as well as the late competition on certain products. We continue to be pleased with how we are building our product portfolio in Canada and our related business development activities. We have two sterile injectable product filings pending approval with Health Canada. In addition, for the in-licensing of ENVARSUS XR, we recently announced a definitive agreement with Bioprojet to register, commercialize and distribute pitolisant on an exclusive basis in Canada. This product complements Paladin's promoted Specialty portfolio and we expect will provide us with additional growth pillars. Turning to slide 9. I've already touched on most of the scorecard items during our segment performance update. To add, the U.S. Branded Sterile Injectables and U.S. Generic Pharmaceuticals segments collectively launched six new products to-date. Once again, you'll see some of our key first-to-file, first-to-market opportunities for the second half of 2019 and beyond. We are proud of the many achievements to-date and the steadfast focus of our employees to execute on all levels. Our industry is in the midst of some truly fundamental changes. The healthcare environment in Endo will undoubtedly look very different several years from now and we will execute on our strategy. I'm also so grateful to all of Endo's employees for their commitment and hard work. Now let me turn the call over to Blaise, to further discuss the company's second quarter financial performance. Blaise?

[Blaise Coleman:]

Thank you, Paul, and good morning, everyone. First, on slide 10, you will see a snapshot of the second 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 $0.23 from continuing operations in the quarter, versus a loss of $3.12 in the second quarter of 2017. GAAP operating income in second quarter 2018 was $55 million compared to GAAP operating loss of $587 million during the same period in 2017. This is primarily due to lower pre-tax, non-cash asset impairment charges. On an adjusted basis, second quarter results were strong. Adjusted operating income of $322 million and adjusted diluted earnings per share from continuing operations of $0.76 exceeded our expectations for the quarter and reflects significantly improved gross margin versus prior year. The approximately 1,000 basis point improvement in adjusted gross margin in second quarter 2018 versus the same period last year was primarily due to favorable business mix, driven by revenue growth in Sterile Injectables and Branded Specialty products, and benefits from our ongoing cost efficiency initiatives. In addition, our adjusted gross margin reflects an approximately $8 million benefit related to a contract termination. Turning to slide 11. Based on our better-than-expected first half 2018 performance, driven by both higher revenue and adjusted gross margin, we are raising full year financial guidance. We are raising our revenue expectations from our initial guidance of $2.6 billion to $2.8 billion and now expect 2018 revenues to be $2.75 billion to $2.85 billion. We're also raising our adjusted EBITDA and adjusted earnings per share from continuing operations guidance and now expect them to be $1.27 billion to $1.33 billion and $2.50 to $2.60, respectively. Please note that we're also updating our adjusted gross margin and adjusted operating expense assumptions. We now anticipate our second half 2018 adjusted operating expenses to be at a similar level to first half 2018. This higher than previously planned full year 2018 spend reflects our previously-stated capital allocation priority to fully invest in our core areas of growth. In this context, the majority of the higher spend will be in both selling and marketing and R&D initiatives. The selling and marketing increase reflects continued strong investment in XIAFLEX to further fuel our growth momentum. In terms of R&D investment, we'll be funding a number of additional promising development projects across our portfolio to further enhance our go-forward pipeline. In addition to investments in selling and marketing and R&D initiatives, we're also anticipating higher than previously expected legal spend, driven by ongoing litigation matters. In terms of second half 2018 adjusted P&L phasing, assuming the midpoint of our updated financial guidance range, we expect third and fourth quarter revenue and adjusted EBITDA to be fairly balanced. Lastly, in terms of projected cash flow on slide 12, we had $129 million in cash flow prior to debt payment in the first half of 2018, and now expect use of cash prior to debt payment for full year 2018 to be in the range of approximately $265 million to $205 million. The change primarily reflects higher adjusted EBITDA, favorable source of cash from changes in working capital and a shift of non-mesh legal payments to 2019. We ended the first half of 2018 with approximately $1.1 billion of unrestricted cash; and at second quarter end, our net debt to adjusted EBITDA leverage ratio was approximately 5.2 times. Now, let me turn it back over to Paul. Paul?

[Paul V. Campanelli:]

Thank you, Blaise. I continue to be extremely proud of our team and what we have achieved to-date. The results of our actions over the last couple of years validate our belief that we have the right people in place that are helping turn Endo around. Despite circumstances that could have easily distracted us, we remain focused on our actions we can control and we will continue to do so. We are very excited and await the results of our Phase 3 trials for cellulite over the coming months. In closing, I would like to thank Steve Mock, my friend and Endo's former Senior Vice President of Investor Relations and Corporate Affairs, for his leadership, expertise and commitment to the organization. Since his retirement, we've been searching for the right candidate to lead these functions. That said, I am pleased to announce the appointment of Laure Park into this role. Laure brings with her significant business and strategic experience along with an outstanding leadership and communication style that will be great benefit for Endo and lead us into the future. Nina Goworek will continue to be the main point of contact for investors, while Heather Zoumas-Lubeski will continue to be the main point of contact for our media coverage. I would like to thank Nina and Heather for their continuous contributions and professionalism during this interim period. Now, let me 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. George, may we have the first question please?

[Operator:]

Thank you. And our first question comes from the line of Liav Abraham from Citi. Your line is now open.

[Liav Abraham:]

Good morning. Just a couple of questions. Paul, firstly on XIAFLEX, can you go into a little bit more detail on some of the drivers behind the strength? I know you've updated your guidance for the full year on this product. What's behind this? What returns are you seeing from the DTC campaign or anything else that you're seeing that's affecting the positive growth of this product? And then secondly, I know you're not giving 2019 guidance, but any comments you can make on the potential for EBITDA growth in 2019 versus 2018, given some of the positive dynamics you're seeing in the business; XIAFLEX, the injectables franchise, the contribution of Somerset? Could we see growth – EBITDA growth in 2019 versus 2018? Any thoughts would be helpful. Thank you.

[Paul V. Campanelli:]

Yeah. Thank you, Liav. I appreciate the question. I mean, I'll start with the EBITDA. So I think it's obviously still early in the process, so we're going to have to ask you and folks to be patient in that regard. There is still a degree of uncertainties in the generic environment, while we feel good about the recent cautiously-optimistic statement that we're talking about. There's still a degree of products that we need to watch very carefully, so it's going to be early on the EBITDA side. For XIAFLEX, I think what we've talked about is, is how we've invested in a consumer activation program. We put a lot of resources behind that. I think we've talked about how we've narrowed the focus on dating back about 18 months into our Specialty business and that's one of the main reasons we had moved away from the pain segment. So I think, being highly focused, focusing on consumer activation. And then we want to continue, frankly, to put resources into this area. And I think it still remains an area for some modest growth and keeping in mind that the product for the indication for Dupuytren's has been in market for probably about eight years now and maybe Peyronie's is just a little bit later than that. But maybe like some specific areas when we look at Peyronie's disease and we say that PD is up around 26% year-over-year, I think what excites us is when we talk a little bit about that particular indication. And we like to always mention that about 55% of all the Peyronie's patients that receive XIAFLEX, you've got to go back and look at Peyronie's specifically; 2% of those patients are diagnosed and 2% are treated. So I think at the end of the day, we feel pretty good about certain statistics about being able to grow in Peyronie's. XIAFLEX captures in essence 55% of those patients treated. So that's an area that I think will remain an area of focus. And similarly in Dupuytren's, while it was up 6% year-over-year, we also see where we want to continue to invest in Dupuytren's and we think that's going to be a growth area. And ultimately, XIAFLEX captures around 26% of treated patients. So these are still small percentages that we think we can grow and we're going to continue to invest in our consumer activation program.

[Nina Goworek:]

George, can we go to the next question, please?

[Operator:]

Sure. And our next question comes from the line of Ami Fadia from Leerink. Your line is now open.

[Ami Fadia:]

Hi. Good morning. Thanks for the question. Could you talk a little bit about the in-licensing transaction that Nevakar announced this morning? How does that evolve your thinking with respect to potential new product launches into 2019 and 2020? And separately, just on ADRENALIN, what's driving growth there? If you could elaborate on some of the drivers. And thirdly, just, what's your latest thinking with respect to pricing and market potential for the cellulite indication? Thank you.

[Paul V. Campanelli:]

Sure. Okay. So we'll start with Nevakar. We always like to start out with our focus on that we have to be laser-focused on debt pay down. So there was a modest investment in this development deal. I would call it more of a near-term type of opportunity, and I would say it probably – we're hoping that we would see some benefit in late 2020. I think what's special about this particular opportunity, as we mentioned, it's five products. They're specifically in 505(b)(2) areas. That's an area that we like. But we've got to go back to the company itself, Nevakar and the people that run that company, and we've got a past relationship with the Nevakar team that was formerly known as InnoPharma, and the CEO is Navneet Puri. Ultimately, we've had a lot of success with this particular team back when we acquired our Rochester facility. And some of the products that we're very proud of that they brought us included dexmedetomidine and ethacrynic acid just to name a few. So we're kind of going back to people that we've had successful history on. We want to bring differentiated products into the critical care arena, and it's always nice to really be focused on known entities. Getting into the ADRENALIN question, I think really – in our prepared remarks, specifically the growth of ADRENALIN is really coming because of the benefit of having the unapproved sources off of the market in 2017. So we feel good about our share, but I think you're getting the benefit ultimately of the unapproved sources off the market for a full year. And then, let me tell – help me out on the pricing question, again, if you can remind me on XIAFLEX...

[Unknown Speaker:]

CCH.

[Paul V. Campanelli:]

CCH. Was it CCH?

[Unknown Speaker:]

Yeah.

[Paul V. Campanelli:]

Okay.

[Ami Fadia:]

Yes, CCH pricing strategy.

[Paul V. Campanelli:]

Yeah. So, I think right now – I think what we're not doing is giving specific pricing. I think it's obviously very early in the process. What we're doing is, is obviously evaluating different views on how we will go about it. And frankly, it's something that we would not be disclosing until very close to our launch. But what we can do is talk about the market in itself and what we like to remind people that the category of cellulite does affect around 85% to 90% post-pubertal women, and I think that's obviously a large population that we're starting with. Then we also like to remind everybody that the U.S. aesthetic market is about a $15 billion market, and it continues to grow. But specifically in an injectable aesthetics, that market's around $3.5 billion and it's growing at a rate of around 7%. So I think those are some of the facts. I think it's also probably important to talk a little bit about the excitement that we're getting from key opinion leaders. And frankly, these key opinion leaders are really looking for innovation in bringing something new into the space. So, there's been a lot of excitement specifically with physicians that we're meeting with. And then probably lastly, the last point that we'd like to put on the table, as we credential ourselves as an aesthetics company and we're going out and we're making ourselves known at conferences that specifically at ASDS, which is the American Society for Dermatologic Surgery, they actually released a survey recently on body contouring. Body contouring is an area in which cellulite is going to be classified. That's up 300% over five years. So while we're not getting specific into pricing and we're not going to, what we can say is that we're incredibly excited about the market, the market potential, and the key opinion leaders are very excited about what we're doing.

[Nina Goworek:]

George, can we have the next question, please?

[Operator:]

Sure. And our next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

Thanks. A couple for Blaise. First, can you talk a little bit about how gross margin could bounce around on the back half? I know you have an influx of some AGs, but talk about how gross margin can bump around, if you would. On VASOSTRICT, can we look at the second quarter level as sort of a pure demand based level such that we could apply the price increase to that to get sort of the ongoing run rate of that product? And lastly, for Paul, back to Nevakar. Can you help us better understand the types of products other than calling them 505(b)(2)s? We know they're injectable or we think they're injectable and they're (b)(2)s, but how differentiated are they? Will they be detailed to docs? Are they just clever tweaks increasingly competitive and intense pair environment? It sort of begs the question of how differentiated these things need to be to justify the deal?

[Blaise Coleman:]

Sure. So Gregg, I'll take that first one.

[Paul V. Campanelli:]

Yeah. And Gregg, could you repeat your second question? We missed that. Sorry, the middle question there.

[Gregg Gilbert:]

Yeah, on VASOSTRICT.

[Paul V. Campanelli:]

Okay.

[Gregg Gilbert:]

So, was the second quarter sales level demand based...

[Paul V. Campanelli:]

Got it.

[Gregg Gilbert:]

...such that we can apply the price increases to that. Thanks.

[Blaise Coleman:]

Yeah. Yeah. And so to start with that one, yeah, what we saw was if you remember we anticipated seeing a step down in Q2 sales which we did, but the level of buying was sort of equal to demand. So that's a good assumption as you move forward. Just in terms if you think about the second half and you think about gross margin, you just need to start with the top line which is where we do anticipate and have factored into our guidance some additional competition on some of our key generic products that currently have either no or limited competition. And so, as that starts to play out and also as you mentioned some of the revenue that we're going to see in the second half that's helping with the increasing guidance, is related to the authorized generics which naturally have a much lower margin than the rest of our portfolio. So as you look at the full year guidance and sort of implied second half, you will see a step down in gross margin mainly due to the mix of what's happening from a revenue standpoint.

[Paul V. Campanelli:]

And then on the Nevakar question, Gregg, I think it's – the starting point is we are going to distribute that portfolio from Nevakar with our existing Branded Sterile team. So, it's with the resources that we already have in place. And then with respect to like – we speak to it as being differentiated; it's in the critical care section of the hospital. Ultimately, if there is a presentation that is not available and there could be either a preservative issue or a stability issue or a different type of presentation, that's pretty much what we're talking about here. There is a need for it and it's an area that we really want to expand in terms of our own internal development capabilities.

[Gregg Gilbert:]

Thanks.

[Nina Goworek:]

George, can we have the next question, please?

[Operator:]

Sure. And our next question comes from the line of Randall Stanicky from RBC Capital Markets. Your line is now open.

[Randall S. Stanicky:]

Great. Thanks, Paul. You've now referenced cautious optimism in the last several quarters. And clearly, the results you're putting up are better and certainly better than some of your peers, particularly this morning. What do you specifically need to see to move off of cautious optimism and get a little bit more comfortable that we're at the bottom or even improving? And then the adjunct to that is are we yet seeing specific instances amongst the consortium buyers where we're seeing scrambling for supply, given some of the pruning? Or do we still need to see the industry continue to contract or prune further? Thanks.

[Paul V. Campanelli:]

Yeah. Thanks, Randall. It's a great question in terms of the use of the word, cautiously optimistic. I mean we're halfway through the year, right. So I'd like to stay – I still got halfway to go. So not to avoid the question. I think what's happened here is, I mean I'll speak specifically for Par, right, and we made some tough decisions more than 18 months ago and I think those decisions are showing some durability with the existing Par portfolio. So, while maybe some of my competitors are having some struggles, I think perhaps we were first movers when it came down to the portfolio. In essence, I made the statement that there is really not much more that we're able to provide to the consortiums given where pricing levels went, and I think that's where we are. So, let us see where the second half of 2018 lead us to, but I think we really took all the measures in place to make that portfolio as durable as possible. And then maybe, Randall, maybe you can just remind me of that second question you had?

[Randall S. Stanicky:]

Yeah. I mean just very simply, one of the, I think, rebound points is when the industry's pruned enough product that we're down to enough competitors that we're seeing,...

[Paul V. Campanelli:]

Yeah.

[Randall S. Stanicky:]

...the consortiums think twice about price negotiations and look for security of supply. And so the question is, has the industry overall pruned enough and have we shrunk enough to the point where we're looking at more stability in pricing power?

[Paul V. Campanelli:]

Yeah. So it's another great question, and I'm not sure that we're exactly there when you look at it from an industry standpoint. So I think there's a little – I think there is a ways to go. I think the way we are looking at it, so you have these three consortiums and they all represent about a third of the market. You have almost equal sharing. You have basically price parity. The issues that you're going to see coming out of this on a go-forward basis is probably the obvious, where companies that are making tough decisions on products because of price then you've got this dynamic of capacity. And if you lose an account, you're not losing just a customer, you're losing a third of the volume. These are decisions that generic manufacturers have to be thinking about. That's what we were doing back a year ago, and you see the joining of the consortium. So you've got this pricing dynamic, but the fact of the matter is that you've got to be willing to walk away from a customer. When you're doing that, you're making a statement on capacity; you're not turning a button and switching it back on. You, in essence, at least in Par's lens, are willing to walk away and not come back on certain types of products. That's where we are. I think that's where some of our competitors are heading right now.

[Randall S. Stanicky:]

Great. Thanks, Paul.

[Paul V. Campanelli:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Dana Flanders from Goldman Sachs. Your line is now open.

[Dana Flanders:]

Hi. Thank you very much for the questions. My first is, can you just touch on the outlook for ADRENALIN into the second half and 2019? I think you had a competitor on the 1 mL. I'm just curious if guidance reflects competition on the 30 mL, or if you think that's a possibility? And then my second, just quick follow-up is, CCH obviously would benefit from being one of the first or the first non-invasive injectable product on the market for cellulite. How do you think about just the need to build market awareness and education? And what steps are you taking on that front? I know we're still a ways out from launch, but just curious how you're thinking about that. Thank you.

[Paul V. Campanelli:]

So, great. Thank you. Starting with maybe the CCH question and market awareness. I think – well, the starting point is, is that we brought talent into the organization, right? So we're planning for success. We've got Pat Barry leading us in the Branded Specialty division. We've recruited talent to help guide us on the marketing side. We're incredibly excited about that prospect. It's something that we've invested a lot of time in. So we've got people in place and bringing more people in place. And then it goes back to a little bit what I was talking about of getting ourselves credentialed out there. And clearly, there is a need for innovation, so we're out at the conferences. We've got our name out there, awareness is going on, and that's really the starting point. It's going to be an evolution as we await for the top line results in November and heading towards submission. But I think from a marketing standpoint, we're putting all the systems and procedures in place that you would expect us to be doing from an awareness standpoint. On ADRENALIN, we're not going to provide any specific guidance on 2019. What I can tell you is where we are today and then you can take that in view in how you would do in normal course. While there has been an approval on the 1 mL, there has not been a launch on the 1 mL. The company that has the approval has an ampule. There is already an ampule on the 1 mL in the market. So there is a company called Belcher, they have an ampule. There's another pending which has not launched. And keeping in mind, there is an Orange Book patent on the 1 mL. So I think there's more to come in that regard. From a market standpoint, I would tell you that the 1 mL represents about 20% of our market and keeping in mind that we have a more desirable vial in place. So, I think that's where we are on the 1 mL. Regarding the 30 mL, that's still subject to Orange Book patents. Anybody that wanting to get into that and nobody's filed yet, we have not been noticed by anybody that you need to file a Paragraph IV with respect to the 30 mL ADRENALIN. We are in litigation with Hospira on the 1 mL already. They filed on our existing Orange Book patents. What we are pleased to announce is that, Judge Fallon dismissed a summary judgment plea by Hospira. That to me would indicate that we are moving towards a 30-month stay. So I think hopefully that clarifies the ADRENALIN question.

[Dana Flanders:]

It does. Thank you.

[Operator:]

Thank you. And our next question comes from the line of David Buck from B. Riley FBR. Your line is now open.

[David George Buck:]

Yes. Good morning. Thanks for taking the question. One for the Nevakar and Somerset in-licensings, maybe for Paul, how should we think about this in terms of added infrastructure, if at all, in 2019 and R&D spend? Or are these companies essentially spending now sort of ahead of acquisition? And one for Blaise. Can you talk a little bit about whether there is still further benefit that you're expecting to see from culling of products and the transition out of Alabama with some of the legacy generics? And finally for Paul, just the products on the Sterile Injectables going forward, do you see those being products that have patentability and some type of exclusivity other than just some tweaks from preservative-free, et cetera? Thanks.

[Paul V. Campanelli:]

Sure, Dave. Just for clarification, when you're talking about the patents, are you talking about specifically for Nevakar or in general, just so I'm clear.

[David George Buck:]

Well, just in general. So I mean, do you expect to see that type of protection from...

[Paul V. Campanelli:]

Yeah.

[Blaise Coleman:]

Okay.

[David George Buck:]

...Nevakar or Somerset and your own business.

[Paul V. Campanelli:]

Okay. So, fair. Thank you. So maybe just to differentiate a little bit. So, as we had said regarding the Somerset deal, that was the starting point for Somerset. And if you look at the portfolio of the products that they've gotten recently approved on and launched, those are products that are existing in the market. So they're off patent. You're not going to see intellectual property with that portfolio of products in development, at least not to start. We'll build intellectual property as we move forward, but these are still really healthy margin products. We're really excited about that. We're not getting too deep into R&D spend for the future. But again, on Somerset, they are injectables, you don't have to deal with bioequivalence, so you don't have that expense. And so, I'm not anticipating additional R&D spend with respect to Somerset. So we'll handle that with what we have, but we're not going to go too deep further beyond our R&D for 2019. Then with Nevakar, I think what you're going to – what we're hoping to do with 505(b)(2) is where we can. Some products in essence, and we always try to pursue this, when applicable we like to go for intellectual property as we did with VASOSTRICT and ADRENALIN products of those nature. And I'm hoping and anticipating that some of the Nevakar opportunities will fall into that category. And then I'll pass over to Blaise.

[Blaise Coleman:]

Yeah. So David, on your gross margin question, just in terms of our full year adjusted gross margin and the increase year-over-year, just to break that down, about two-thirds – and assuming the midpoint of our guidance, about two-thirds of that is due to favorable sales mix. And then about a third is going to be due to cost efficiencies. So as you look at our full year guidance, yeah, we will have some additional benefit from the cost efficiencies in the second half of the year when we think about it from a year-over-year perspective. And obviously, that's built into the guidance we provided today.

[David George Buck:]

Great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Annabel Samimy from Stifel. Your line is now open.

[Nick C. Rubino:]

Hi. This is Nick Rubino on for Annabel Samimy. Thanks for taking our question. We just have one quick one and just to dig a little more on to XIAFLEX and cellulite. What's the average number of vials? And how will you start to look in terms of overall cost of the treatment?

[Paul V. Campanelli:]

So, I'll start. Again, the cost or i.e. the price, we're not going to get into, right? That is something that we will provide as we get closer to launch. And I'll go back to my previous statement that we've provided color on the aesthetics market. Regarding the...

[Blaise Coleman:]

Number of vials.

[Paul V. Campanelli:]

...number of vials, do we...

[Blaise Coleman:]

For cellulite?

[Paul V. Campanelli:]

Well, I thought it was for XIAFLEX. (00

[Blaise Coleman:]

Can you clarify your question? What was the question on vials?

[Nick C. Rubino:]

Sorry, what was that?

[Paul V. Campanelli:]

Nick, can you clarify your question on the vials? Sorry, we're trying to clarify what your question was.

[Nick C. Rubino:]

Yeah, yeah. I guess, we're just wondering what the average number of vials, I guess, per patient would be in terms of – over the course of their treatment.

[Paul V. Campanelli:]

For cellulite, Peyronie's or Dupuytren's?

[Nick C. Rubino:]

For cellulite, please.

[Paul V. Campanelli:]

Yeah. So the clinical trial of our protocol was three treatments, two vials per treatment. So it's – again I'll simplify it; two, two, and two for a total of six vials. That's the clinical trial.

[Nick C. Rubino:]

Okay. Got you. Great. Thank you. We appreciate the additional color.

[Paul V. Campanelli:]

Yeah.

[Operator:]

And our next question comes from the line of David Amsellem from Piper Jaffray. Your line is now open.

[David A. Amsellem:]

Thanks. So I joined late, so you may have already addressed this. So I apologize, if you did. So just quickly on ertapenem, on the AG, can you just talk about your economics there and how it compares to corporate margins? And then how the competitive landscape on that product is going to shake out the number of pending filings, and how you're thinking about competition emerging over the next 6 to 12 months? And then secondly, on the Somerset products, you cited a half a dozen approvals, I believe. So if you have any specifics on those approvals, the underlying sales opportunities there, that would also be helpful. Thank you.

[Paul V. Campanelli:]

Sure. So on ertapenem, the way we typically explain ertapenem, keep in mind we are a distributor on behalf of Merck. So there've been standards in terms of what a surrogate AG would be. I would say, this is a standard AG deal. So, I think it's relatively known what that means in the environment. So there's – we're incredibly proud to be the distributor for Merck in this particular product, but you should look at it as you would any standard straight AG deal. Regarding the market conditions, there is one generic approval we're going head-to-head with right now. While I'll don't get too far ahead of the future, I think it's well known that there's probably about three ANDAs on file pending some approval process. So, I think you should look at it in those terms. And then regarding Somerset, in terms we have the approvals, but we haven't provided any financials. At this point in time, I think it's too early to go into the specifics. I think what we're saying is, this is a company that is historically executing, they've got commercial products already in the market. And since the announcement back in April, these guys have not missed a beat. We're incredibly excited. We're hoping that deal is going to close in the fourth quarter. At that point in time, we'll be able to provide a little bit more color.

[David A. Amsellem:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line Gary Nachman from Bank of Montreal. Your line is now open.

[Gary Nachman:]

Hi. Good morning. First, Blaise, what's your updated target for when you could get leverage maybe down below 4 times? Could that happen potentially next year? And Paul, I know you said with Nevakar you were conscious of investment. So are there a lot more Nevakars out there or Somersets out there? And then just – oh, yeah, just one more just on cellulite. How many patients are you enrolling? And the acceleration, was that just from demand or did you also add sites in the study? Thanks.

[Paul V. Campanelli:]

So on cellulite, it's a 2x4 20-patient study. We have 50 sites. The bottom line is that the enrollment went a little bit quicker than what we anticipated. So, that's the justification for the update. And Gary, help me out on Somerset, what was the question?

[Gary Nachman:]

I know you said, with Nevakar you were conscious of investment, given your leverage obviously. So are there a lot more Nevakars out there or Somerset-type deals out there?

[Paul V. Campanelli:]

Yeah. Yeah.

[Gary Nachman:]

And then Blaise, just when do you think you could get leverage down meaningfully?

[Paul V. Campanelli:]

Yeah. So, I mean I think the way I look at the Somerset and Nevakars, I mean these – the business development team here at Endo, they are always on the hunt for an opportunity that maybe somebody else hasn't seen. These two particular injectable opportunities really are not new to us. This is something that we have followed for a series of years and I think we're able to execute at the right time. The question is are there a lot more out there? I mean, I think they evolve over time. It's probably the best way of looking at it. So if we take a very thoughtful, mindful approach and follow things and whenever we can partner with somebody that we've got a positive previous history, it makes it a little bit easier. But frankly, we've got to be laser-focused on our capital allocation and in our debt pay down. So, there's going to be a lot of due diligence on go-forward basis. I think what I'd like to maybe just make sure everybody understands is, now with Somerset there's going to be considerable integration and we're on the process of expecting favorable top line data for cellulite. We have a lot of work to do, as we look at 2018 and 2019. So there's going to be a lot of focus on just that. So I want to be very cautious about executing on other business development deals near term. There's an enormous amount of integration that's going to be happening in 2019.

[Blaise Coleman:]

Yeah. And then, Gary, just in terms of your question on leverage. As we have stated, our strategic priority or one of our strategic priorities is to get back to under 4 times over time. And we've talked about that's really going to come through a combination of ultimately through adjusted EBITDA growth and net debt reduction, but we do have a number of uncertainties in front of us. So at this given point in time, we haven't put any timeframe on that and we're not going to do that at this time either.

[Gary Nachman:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Louise Chen from Cantor Fitzgerald. Your line is now open.

[Louise Chen:]

Hi. Thanks for taking my questions. I had a few here. So first question I had was on your cellulite product. Do you expect pricing parity between your medical indications and your aesthetic ones? And then secondly, if cellulite works as planned and you get it approved, will you bring on more aesthetic products to add to your portfolio? And then lastly, just back on the generic market environment, you did note some stabilization. Just curious if you think that pricing will eventually improve or will stay the same for the foreseeable future, and what do you think is driving the stabilization? Thank you.

[Paul V. Campanelli:]

Sure. So Louise, I'll start with the generics. In terms of pricing improvement, I mean that's something that I don't see. I think it's understood with the consortiums and that's the challenge. What I'm saying is when we see it stabilizing, I think what we're saying is erosion is not worse than expected. And it's starting to flow into what I was referring to as kind of the pre-2015 normal course. Now, we don't provide guidance on erosion, but the way I think you should be looking at it is that stabilization means it's not getting worse, and I would leave it probably at that. Regarding – and I'll back up in terms of your question on adding more aesthetics products into the portfolio. The very first thing that we have to do, we just talked about de-levering and being focused on debt pay down. That is number one – the number one priority. So again, our PD team is always going to go out there and look for an opportunity. We're going to have a database full of potential opportunities, whether it's aesthetics or injectables or even generic products. But in the case of aesthetics, let us pass the study, let us prove success, let's focus on debt pay down, and then we can look at next steps for our aesthetics team that we're building. Regarding pricing on cellulite, we're not going to get into specific pricing with respect to end market indications in cellulite. I think that's something that again just we're asking everybody to be patient; and as we get closer to launch, we can talk more about pricing.

[Louise Chen:]

Okay. Thank you.

[Paul V. Campanelli:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of Stephen Ragard from Mizuho. Your line is now open.

[Stephen Ragard:]

Yeah. Good morning. Thanks for taking my question. So on the CCH program in cellulite, will you need to submit a separate BLA? And if not, what regulatory pathway do you plan to pursue?

[Paul V. Campanelli:]

So regarding that, our intention is to file a separate BLA, right. So I think that's going to ultimately be the focus of what we're looking at. People need to understand, I think we've communicated in the past that what have done is we have created a new presentation, right. And we talked a little bit about concentration being one-tenth of the concentration that's used in the already approved indications. You've got a new indication, you've got a new concentration and you've got a new patient population. And these are areas and reasons why we believe that we will be filing a separate BLA.

[Stephen Ragard:]

Thank you.

[Nina Goworek:]

George, can we go to the next?

[Operator:]

Thank you. And our next question comes from the line of (00

[Unknown Speaker:]

Hi. Good morning. Thanks for taking my question. My question is on litigation risk. Do you expect any near-term update on the litigation front and on opioids? Can we expect an update this quarter on the motions to dismiss? I know that some motions have been fully briefed. Any update on that? Thank you.

[Paul V. Campanelli:]

I'm sorry. We're going to need you to repeat that question. Unfortunately, I just couldn't hear your question. I apologize.

[Unknown Speaker:]

If you had any near-term update on the litigation front, and any update on the motions to dismiss on the opioids front?

[Paul V. Campanelli:]

Sure. So our starting point is, we're never going to go into any great detail. We can't comment specifically on ongoing litigation. And I think this is going to be specific to opioids; that's where I assume that your question really is headed. What we've communicated regarding opioids is that, ultimately we are – what we're saying is, we still believe that we are, for the most part, at the early stages. And what we've communicated is that, last earnings call we indicated that there was about 860 cases against Endo and that it has increased to about 1,300 cases three months later. What we are telling people is that the judge has communicated that there's going to be three bellwether cases that are targeted for March. However, we have reason to believe that those three cases could be pushed back a little bit. So, it's really stay tuned. So, that's probably as far as we can go specifically on opioid litigation. I would maybe make one further comment that, over the next couple of months I don't want to leave you with the impression that we're not doing anything or nothing is happening. I would say that there has been some dialogue with plaintiffs and state AGs. I would probably say, it's somewhat constructive, but I don't want anybody to believe that this thing is advancing. It's still at the very, very early stages. But for the fact, there has been dialogue. And I'll leave it at that.

[Unknown Speaker:]

Thanks. Thank you for the color. Thank you.

[Operator:]

Thank you. I show no further questions at this time. I would like to turn the call back over to Paul Campanelli, President and CEO, for closing remarks.

[Paul V. Campanelli:]

Thank you. All I just really want to say is that we do, in fact, appreciate your continued interest and support of the company. We do look forward to providing you with updates as we move forward later in the year. And thank you all for joining us this morning.

[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.