Endo International plc
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Endo International Plc Third Quarter 2018 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 follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Laure Park, Senior Vice President, Investor Relations and Corporate Affairs. You may begin.

[Laure Park:]

Good morning and thank you for joining us to discuss our third quarter 2018 financial results. Joining me on today's call are Paul Campanelli, President and CEO of Endo; Blaise Coleman, Executive Vice President and CFO; and Pat Barry, Executive Vice President and Chief Commercial Officer of our Branded Business. 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 measure is contained in our earnings press release issued prior to today's call unless otherwise noted therein. I'd now like to turn the call over to Paul.

[Paul V. Campanelli:]

Thank you, Laure. 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 third quarter 2018 earnings presentation. Beginning on slide 2, here's a brief agenda for today's call. Moving to slide 3, everything we do at Endo is grounded in the execution of our strategic priorities. I'm proud of the progress we've made over the past two years to reshape our organization and to help position us for future growth. I'm very pleased to report that our strong Q3 adjusted operating results reflect continued progress on that journey. Moving to slide 4. Revenues for XIAFLEX and our Sterile Injectables segment continue their double-digit growth momentum. Our third quarter performance also reflects solid adjusted EBITDA and an expansion of adjusted gross margin compared to the third quarter 2017. This adjusted gross margin expansion was driven by a combination of cost efficiencies and favorable year-over-year product mix, as we continue to focus our efforts on driving growth in higher-margin areas of our business. Based on these results, we are 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 5, you will see a snapshot of our segment revenues for the third quarter. From a total enterprise perspective, the quarter's performance versus the same period last year was primarily attributable to competitive pressures and product discontinuations in the U.S. Generic Pharmaceutical segment; the divestiture of Somar, our former Mexican business; and our voluntary market withdrawal of OPANA ER. These factors were partly offset by the launch of ertapenem for injection, the authorized generic of INVANZ, and the colchicine tablets launch, the authorized generic of COLCRYS; continued strong growth in both our U.S. Branded Sterile Injectables segment and the Specialty Products portfolio of our U.S. Branded Specialty & Established Pharmaceuticals segment. On a sequential basis, total enterprise revenues increased 4% from $715 million in the second quarter of this year to $745 million in the third quarter this year, which was our second quarter of sequential growth. Now, moving to slide 6. Our Branded Specialty portfolio continued to advance in the third quarter with growth of 13% year-over-year. This is largely driven by the significant growth of our XIAFLEX franchise, which grew 22% in the third quarter versus the third quarter of 2017. Branded Established Product performance reflects the voluntary market withdrawal of OPANA ER in 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 22% year-over-year, fueled mainly by strong demand growth driven by our focused execution and continued investment in our integrated commercial strategy. This includes expanded consumer awareness and activation for both Peyronie's and Dupuytren's Contracture indications. Based on robust year-to-date XIAFLEX revenue growth, we now expect XIAFLEX full-year revenue growth to be in the low-20s percentage range versus our previous guidance of high-teens percentage growth. Moving on to CCH for cellulite treatment development program. We are extremely pleased with the positive results from the Phase 3 trials, and look forward to taking the next step to bring this innovative injectable treatment to market for patients. As you can see from slide 7, subjects receiving CCH showed highly statistically significant levels of improvement in the appearance of cellulite with treatment, as measured by the trial's primary endpoint which was a 2-level composite response improvement in the target buttock at Day 71, compared to those subjects receiving placebo. Additionally, the RELEASE-1 study passed eight out of eight key secondary endpoints and the RELEASE-2 study passed seven of eight key secondary endpoints. Finally, CCH was well-tolerated in the actively treated subjects with the most adverse events being mild to moderate in severity and primarily limited to a local injection area. Let's highlight two of the secondary endpoints. First, 54.3% of subjects in RELEASE-1 study and 57.9% of subjects in RELEASE-2 study receiving CCH demonstrated a highly statistically significant 1-level improvement on the patient's assessment of appearance of cellulite in the target buttock at Day 71, as measured by the Patient Reported Photonumeric Cellulite Severity Scale scores, compared to only 36.2% and 29.6% of placebo subjects, respectively. Moving to the far right of each chart, 73.3% of subjects in the RELEASE-1 study and 67.8% of subjects in the RELEASE-2 study receiving CCH were reported as improved, or very improved, or very much improved in the global appearance of their cellulite area, as assessed by the subject Global Aesthetic Improvement Scale in the target buttock at Day 71, compared to only 43.2% and 24.1% of placebo subjects respectively. And finally, one of the things that we've learned over the past year is the importance of before and after photos. On slide 8, you will see a subject before-and-after photo illustrating the achievement of our primary endpoint. We believe we are well positioned to fulfill a high unmet patient need with new, innovative and clinically meaningful option to address cellulite if this product is approved. This is a great accomplishment by our clinical development team and I couldn't be more proud. I'm also excited by our progress in preparing to enter the medical aesthetics market. In 2018, we attended and sponsored nine key aesthetic conferences, presented Phase 2b data and hosted several advisory boards. This provided us with platforms to credential Endo and medical aesthetics and to showcase the encore Phase 2b data to key plastic surgeons and cosmetic dermatologists. Moving forward, we will continue with our regulatory and pre-commercialization activities and are targeting a market launch in the second half of 2020. Turning to slide 9. Our U.S. Branded Sterile Injectables segment continues to deliver with sales growth of 17% in the third quarter of 2018 versus the third quarter of 2017. This growth was driven by the July 26 launch of ertapenem for injection, the authorized generic of INVANZ, with sales of $26 million. Contributing to the revenue growth was ADRENALIN with sales of $35 million in the quarter, a 40% increase versus the same period in 2017; and VASOSTRICT with a 6% year-over-year quarterly sales increase to $112 million. Based on our strong year-to-date results, we now project full-year U.S. Branded Sterile Injectables revenue to grow in the low-20s percentage range. The continued strong performance of our Sterile Injectables business further validates our strategic decision to increase investment in this segment. We are excited by our plan to further enhance our Sterile Injectables portfolio for today and the future, with additional products that will benefit patients by providing new treatments in the hospital and critical care environment through the previously announced Nevakar licensing deal and the Somerset Therapeutics acquisition. Speaking of Somerset, the acquisition remains on track and we expect it to close in Q1 2019. We continue to be enthusiastic about the acquisition and we look forward to integrating Somerset and Wintac into our company. Turning to our U.S. Generic Pharmaceuticals on slide 10. The performance for this segment during the third quarter versus the same period in the prior year reflects competitive market pressures as well as previously announced product discontinuations. This performance was partially offset by the July 1 launch of colchicine tablets, the authorized generic of COLCRYS, which was the result of a first-to-file Paragraph IV settlement agreement. Performance was also benefited from delayed competition on certain products. We expect our full-year 2018 U.S. Generics revenue to decline in the mid-30s percentage range. Now, with regard to overall generic retail market conditions, we continue to be encouraged that the downward pressures that we've experienced over the past few years appear to be stabilizing. We have seen promising early signals and remain cautiously optimistic. We are excited about our pipeline, our product selection process, and the progress we've made to-date to reshape our portfolio for the future. Moving to slide 11. Let's briefly discuss International Pharmaceuticals. As expected, our international performance reflects the divestiture of Somar in the fourth quarter of 2017. Additionally, as we discussed in August, third quarter revenues were impacted by the cadence of ex-U.S. XIAFLEX shipments in Q2 and Q3. For the full-year 2018, we expect International Pharmaceuticals to decline approximately 40% compared to full-year 2017. Turning to slide 12. The U.S. Branded Sterile Injectables and U.S. Generics Pharmaceuticals segments collectively launched 10 new products year-to-date, with approximately 15 new product launches expected for the full year. Once again, you'll see some of our key future first-to-file or first-to-market opportunities. We expect that the acquisition of Somerset will expand our near- to medium-term pipeline. We've been very pleased with our continued regulatory execution. Since we announced the acquisition in April, Somerset has attained seven additional FDA approvals, commercially launching five of the products. Additionally, our pipeline is further supplemented with strategic relationships with third parties such as Nevakar, which will potentially provide five differentiated 505(b)(2) hospital and critical care-based products. We are proud of the many achievements to-date and the steadfast focus of our employees to execute on all levels. Just as Endo looks different than it did two years ago, Endo will undoubtedly look very different several years from now as we continue to execute on our strategy. I'm 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 third quarter financial performance. Blaise?

[Blaise Coleman:]

Thank you, Paul, and good morning, everyone. First, on slide 13, you'll see a snapshot of third 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 $0.65 from continuing operations in the quarter, versus a loss of $0.45 per share in the third quarter of 2017. GAAP operating loss in third quarter 2018 was $13 million, compared to GAAP operating loss of $2 million during the same period in 2017. This was primarily driven by lower revenue and non-cash asset impairment charges. On an adjusted basis, third quarter results were stronger than expected. Third quarter adjusted operating income of $299 million and adjusted diluted earnings per share from continuing operations of $0.71 reflects an improved adjusted gross margin percentage compared to third quarter 2017. The improvement in the third quarter 2018 adjusted gross margin percentage versus the same period last year was primarily due to favorable business mix, driven by increased revenue in both our U.S. Branded Sterile Injectables and U.S. Branded Specialty products, as well as benefits from our ongoing cost efficiency initiatives. As anticipated, third quarter 2018 adjusted gross margin percentage was lower than second quarter 2018, primarily driven by the lower margin authorized generics launched in the third quarter. Turning to slide 14. Based on our better-than-expected year-to-date 2018 performance, we are raising our full-year financial guidance. We are raising our revenue expectation from our August guidance of $2.75 billion to $2.85 billion and now expect 2018 revenues to be $2.87 billion to $2.92 billion. We are also raising our adjusted EBITDA and our adjusted earnings per share from continuing operations guidance, and now expect them to be $1.32 billion to $1.34 billion and $2.65 to $2.75 respectively. Please note that we are also updating our adjusted gross margin and adjusted operating expenses assumptions. The full-year 2018 adjusted gross margin assumption of approximately 68.5% primarily reflects the impact of our increased revenue outlook, driven by the July authorized generic launches, which carry a seasonally lower adjusted gross margin than the rest of the portfolio. We now expect adjusted operating expenses to be 27% of revenues, at the high end of our previous assumption range. This continues our previously stated priority to fully invest in our core areas of growth. In this context, consistent with what we shared in August, the majority of the higher spend is for selling and marketing and R&D initiatives, along with increased litigation-related spend. The increase in selling and marketing reflects continued strong investment in XIAFLEX to further fuel our growth momentum. In terms of R&D investment, we are funding a number of additional promising development projects across our portfolio to further enhance our go-forward pipeline. Slide15 is a summary of the segment and product-specific guidance previously discussed. Lastly, in terms of projected cash flow on slide 16, for September year-to-date we had $158 million in cash flow prior to debt payment, and now expect cash flow prior to debt payment for full-year 2018 to be in the range of approximately $35 million to $55 million. Our increase in full-year projected cash flow primarily reflects higher adjusted EBITDA and a shift in the estimated closing of the Somerset acquisition from Q4 2018 to Q1 2019. As of September 30, 2018, we had approximately $1.1 billion of unrestricted cash and a net debt to adjusted EBITDA leverage ratio of approximately 5.3 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've achieved to-date. The results of our actions over the last couple of years validate our belief that we have the right strategy and the right people in place to continue the successful execution of the next phase of our multi-year turnaround plan. We believe that our focus on enhancing our capabilities in Sterile Injectables and our Specialty Branded portfolio, including medical aesthetics, along with our emphasis on operational execution, positions us well for the future. Let me now turn the call back over to Laure to manage our question-and-answer period. Laure?

[Laure Park:]

Thank you, Paul. In the interest of time, if you could limit your initial questions to allow us to get in as many as possible before 9 o'clock, we would appreciate it. Operator, let's have the first question.

[Operator:]

Thank you. And your first question comes from the line of Ami Fadia with Leerink Partners. Your line is now open.

[Ami Fadia:]

Good morning. Congratulations on the good quarter and the CCH data. I've got two questions. Firstly, could you elaborate a little bit on your expectation for the regulatory pathway for CCH and your confidence level that you'll be able to file a separate BLA application for that, as well as sort of your initial plan for commercializing the asset? And then, secondly, just on the opioid litigation, what are your latest thoughts around the potential for being able to reach a settlement prior to the trial's beginning? Thank you.

[Paul V. Campanelli:]

Sure. Thank you, Ami. I really appreciate the question. Thanks for the cellulite question to begin with. So maybe I'll start that and I'll pass it over to Pat. With respect to the regulatory pathway, we've had a lot of discussion around BLA versus sBLA. We like to remind everyone the starting point is, we start with the difference of a formulation change. We've got a very different patient population on a go-forward basis. And, again, we feel that we have a strong justification that we will be working with the FDA over the course of time. And I think that will play out. And I think maybe I'll pass that over to Pat for some additional color, and then I'll come back and maybe I'll touch on the opioids.

[Patrick A. Barry:]

Sure. Thanks, Paul. I think your question also related to the timing. So obviously, we're just looking at top-line data. We're extremely excited by the fact that with such a stringent composite primary endpoint that we achieved that with a highly statistical significance. So that's a big win for the company, a big win for patients. 15 of 16 secondaries hitting the mark is really truly remarkable. So we go forward with a great deal of confidence with our regulatory pathway because we've got very strong data. So we'll be looking at the complete dataset, obviously, and we're starting to do that right now. Ultimately, we will be engaging with the FDA early next year with the submission in the second half of 2019. With the BLA submission, as Paul said, the timing on a commercial launch would be the second half of 2020. In regards to our strategy on a BLA, we're very confident, in that we feel like we have a strong strategy that speaks to the inherent differences of the patient population, the inherent differences of the safety profile. And so, for that reason and a number of reasons, we feel very confident with our regulatory submission. And again, it starts with confidence in our data. In 2018, commercially, we've been very active. We've had a very successful introduction of Endo as a new disruptive innovator to the space. And so, we've been in front of over 250 key opinion leaders in 2018. We'll broaden our reach in 2019. Some of the important work we will do, obviously, we will continue to size the market. We're currently doing the very important work in terms of segmenting both the HCP injector market, as well as the consumer market. We will be defining that North Star consumer patient. And, again, this market and the success in this market will begin and end with the strong consumer strategy. So we're working on developing the right tone in terms of how we want to engage with the consumer. We're beginning to staff up as well, which is really, really exciting. And so, there's just a lot of work to do. 2019 will be very much a planning year and a market conditioning year to ready ourselves for a successful commercial launch in the back half of 2020.

[Paul V. Campanelli:]

Yeah.

[Patrick A. Barry:]

I'll turn it back over to Paul for the opioid question.

[Paul V. Campanelli:]

Yeah. Thanks, Pat. And, unfortunately, I really will not be able to place enormous amount of color with respect to timing on negotiations with plaintiffs and AGs prior to the bellwether trial. I think all we can say at this point in time is that we've had constructive dialogues. Obviously, we're very committed, if there's a way to have that settlement. If it's possible and it made sense to the company, obviously, we're entertaining it. Discussions have occurred, but there's no way to make a commitment that a settlement is possible prior to the September bellwether cases. So I think that's really where we are. Interactions are ongoing and constructive dialogue, and it's probably about as far as I'm able to take it at this point in time. Thank you for the questions.

[Laure Park:]

Thanks. Next question.

[Operator:]

Thank you. And your next question comes from the line of Liav Abraham with Citi. Your line is now open.

[Liav Abraham:]

Good morning. Another question on the cellulite data. Paul or Pat, I'd be interested in your thoughts on the magnitude or the effect size between the active and placebo arms of the trial on the primary endpoint, taking account the stringency of the endpoint, but also the fact that the magnitude was a little bit below the Phase 2b. So your thoughts on that. And then, Paul, as we're sitting at the end of 2018, looking into 2019, I'd be interested in your preliminary thoughts on your ability to grow EBITDA next year, especially given the anticipated contribution of Somerset. Thank you.

[Paul V. Campanelli:]

Yeah. Sure. So thanks, Liav. I'll start out maybe again with the cellulite question and I'll pass it over to Pat again. I think what I want to just remind everybody, the way we're looking at this is, we're incredibly, incredibly excited about the statistically significant levels of the improvement. Like, we are three-for-three when we look at the mandated endpoints from the FDA. So incredibly excited. And we'd like to kind of point everybody back to the secondary trials, which we're really, really excited about in terms of when we looked at the secondary endpoints, where may be perhaps it's even more commercially relevant highlighting, as we did on the slides, where we had 54% of the patients in the RELEASE study 1 and 58% of the patients in RELEASE study 2 receiving CCH having a statistically significant response; something that we are very, very excited about. Additionally, we showed on the far right of the slide deck, the second of our secondary primary endpoints, where we showed 68% and 73%, respectively, in the secondary endpoints tied back to the Global Aesthetic Improvement Scale. I think those are incredibly important because that's really more on the patient side where our results were very compelling. So, from that standpoint, large trial, three-for-three, statistically significant, things that we're incredibly excited about and preparing for success. I'll pass it over to Pat and he can probably add a little more color on the placebo side.

[Patrick A. Barry:]

Sure. Thanks, Paul. I think good comments on the results. I would add to the fact that we believe these are great results. To be able to achieve a primary composite endpoint that's such a stringent endpoint, that's a very important regulatory hurdle for us to be able to clear. Despite all comers on BMI, age, cellulite severity, to be able to achieve that separation from placebo is remarkable. And I would characterize the Phase 3 consistent with the Phase 2b. And, again, that's why you do Phase 3s and you learn from the Phase 2bs. So I think they're very compelling results, as Paul indicated to be able to hit 15 of 16 secondary endpoints. 6 of those 8 secondary endpoints are really focused on the patient which, again, acceptance from the patient is going to be the currency of the realm. That's what really is going to be a motivating factor for our aesthetic physicians, giving them something and putting something in their hands that they can effectively address an underlying condition that they're not able to today. And so, given that we see that consistency versus the Phase 2b results, what we can share with you is, obviously, we've had those results for a while. And as we've engaged with the key opinion leaders and shared the Phase 2b results, what's been remarkable is the consistency of response from those key opinion leaders of really understanding the opportunity that they have. Currently, today, there's not an injectable that's approved that allows them to be able to address this very large unmet need. So the fact that we further validated in Phase 3, consistent with what we showed in Phase 3, is remarkable and that we really are on a strong path to be able to introduce a disruptive technology and to be able to have an injectable in the hands of physicians. I think they will find, as they target the right patients, there's a bolus of patients. Right now, they're only treating about 1 out of every 10 cellulite patient that presents on their door. So we've got a large market that's there for us and we believe that there's a strong potential for a product like CCH and cellulite.

[Paul V. Campanelli:]

Yeah. Thanks, Pat. Maybe just – and as you would expect, I'm not going to be able to, at this point in time, provide a lot of color on growing EBITDA for 2019. I think what I can just focus on, we are incredibly excited about Somerset, as I mentioned in my opening remarks. We are working very, very hard to close this deal as close to Q1 as possible. We believe it's on time. They're working very, very hard to do the same. It's going to infuse us with over 40 products. There is about 19 to 20 products already at the FDA. I caution everyone, this is kind of a ramp up. It's near- to medium-term in terms of the expectations and we'll put more color on that at an appropriate time. But that being said, we're incredibly excited about the Somerset deal and we'll certainly be providing more color as we enter into 2019, as we typically do, our typical cadence. Thank you for the question.

[Laure Park:]

Next question, please.

[Operator:]

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

[Randall S. Stanicky:]

Great. Thanks. Paul, just two questions. First, keeping on trend with CCH, can you just talk about your thinking between commercializing versus partnering where you'd still take on a royalty going forward? And then, when we think about the cost to commercialize or the infrastructure that you'll need, how do we think about those needs for the launch of CCH? And then secondly, Paul, again, you called out Generics stabilization and stuck with the cautiously optimistic messaging. But as you look at the cyclical turn in Generics, what's the biggest risk from here? I mean, as you look at some of the India-based competitors, are you seeing any irrational behavior around price as some of the U.S. players continue to prune? Is it FDA from an approvals perspective? What concerns you the most that may prolong this Generic downturn? Thanks.

[Paul V. Campanelli:]

Yeah. Sure. So, let me see if I can take those one at a time. Starting with the commercialization portion of it, I think we've been pretty clear in terms of our strategy and planning for success. What I'm most excited about, obviously, having gotten past the Phase 3 study is remarkable, but having said that, knowing where we were headed in the Phase 2b, we started to attract talent and I think that says a lot about the people that we have here and the product that we're most excited about here today. So we are planning for success. We think that, frankly, I don't believe anybody knows this category or space with respect to medical aesthetics for cellulite more than we do. I mean, we live this every day. Pat certainly has experience. We've brought and been able to attract quality talent from companies that have aesthetics capability. So, right now, our plan is to prepare for success. That being said, as you would expect, if there was an option that was compelling, I would have to always listen to it as you would expect us to do, that's normal course. Absent of that, we are geared up and we are planning to launch this thing the second half of 2020. From the cost for the infrastructure, again, it's the cost of the entry into the market. We're not going to, at this point in time, commit to what we think the value of the product is, but it's something that does excite us and something that we believe warrants the ability to build out the infrastructure from a sales and marketing standpoint. I don't think it's an enormous sales force, but more color will come on that as we get further in the regulatory process. And a lot will also have to do with the path in which we submit our application, whether it's a BLA versus sBLA. So, more to come out in the future, but the way we're looking at it is we're planning for success. The question regarding the Generics environment, and we say that we're cautiously optimistic, and your question is a little around what keeps me up at night. Things are stabilizing and we are not seeing the mass full-line portfolio bids that were out in the past. And I think perhaps that day is behind us because pricing parity in the environment is very close when you have these three large consortiums. The reality is, is your pricing flexibility within these categories are remarkably close. That said, and I've said this consistently, whenever there could be a disruption within a consortium, the sheer nature that a company jumps in and out is something that I always will focus on, right? I'm going to be very curious to see what happens with Rite Aid, as I understand it, their contract with ClarusONE expires I believe March 31. So, that to me is where I would be focusing, but again pricing parity is within these three large consortiums. I think there's been from the ex-U.S. side, from the offshore players, I think they're starting to adjust their models very similar to what you're seeing here in the U.S. where a lot of companies are focusing on gross margin more so than top-line revenue. I think that's also helpful for stability standpoint. But to answer your question, I think the approvals coming out of the FDA is also now tied back to the quality of your application, right? If you're submitting a high quality ANDA, you have a higher probability of getting out quicker. But it really gets down to what's your strategy. Are you filing an application where you're not tied behind a Paragraph IV, or are you just looking to be a first-to-market player? These are all things that are really kind of wrapping around to stability in the market, but I think right now things are feeling good. I want to be cautious because you still have three large consortium players that control a lot of the buying and the selling. So I hope I answered your question, Randall.

[Randall S. Stanicky:]

Yeah. No, that's really helpful. Thanks, Paul.

[Paul V. Campanelli:]

Thank you.

[Laure Park:]

Next question, please.

[Operator:]

And your next question comes from the line of Louise Chen with Cantor Fitzgerald. Your line is now open.

[Jennifer Kim:]

Hi. Thank you. This is Jennifer Kim on for Louise. I had two questions. First, could you broadly break down what the puts and takes are for 2019? And then, second, just going back to CCH, how commercial do you think the product is given what some people view as a lower-than-expected responder rate? And I know you talked about before how the primary endpoint is pretty stringent, but if you could compare the available data that we have for CCH with other currently available cellulite treatments, that would be great. Thank you.

[Paul V. Campanelli:]

All right. So I'll try to tackle some of those questions. So, the first thing, Jennifer, we're pretty clear, we don't provide any guidance and sight on 2019. So we're asking people to be patient. Again, as I said earlier, our normal cadence that we'll provide guidance and that you'll see in 2019. In terms of the commercial viability, I'm going to pass it back over to Pat in a second, but I can't tell you how excited we are about the company. We are statistically significant results. We've passed. We're three-for-three. 843-patient study, no one's ever run a study this large. This is a very, very complicated study and I love the secondary endpoints in terms of what that could mean for us commercially. And this market is desperately in need of innovation, right? There is no innovation in this particular area for cellulite. So I think from that standpoint we are remarkably excited. I'm going to pass it to Pat to maybe add a little color.

[Patrick A. Barry:]

Yeah. Sure, Paul. I mean, I think the commercial viability is obvious and large, and that's why we're excited to have highly statistically significant results to be able to pursue an indication. When you think about the viability of the market, we know that 85% to 98% of women have the condition of cellulite. Vast majority are bothered and the vast majority would seek treatment. We know that, despite great options, for example, in the OTC market there's over $3 billion of spend with not a very good promise on the other side of that spend. So, it's a remarkable market. It's an unmet need. We're going into a marketplace amongst the core physicians that we would be working with that are very comfortable with an injectable. We also have of inexperienced consumer to draw upon that's also very accepting of an injectable. We also see some really interesting trends which are exciting for us. We see a market trending younger with millennials. We also see expansive growth with body contouring. I think in the last five years, if you look at some of the societal data, 300% of growth in body contouring. And those are where – all those markets converge for an opportunity for an injectable to address the underlying cause of cellulite, and that's the fibrous septae. So, in reference to your question of comparative data, that's really not appropriate to be able to compare one data set versus another because it's really apples-to-oranges. I think our composite data really speaks for itself. I think what's important to know, and I think what our key opinion leaders recognize, and I think, look, you're going to be speaking with lots of industry experts and lots of key opinion leaders over the time between now and launch, and I think what you'll find is what we've found, is that the Phase 3 results are consistent with the Phase 2b results. We believe that, based on what our key opinion leaders have told us, that it's clinically meaningful. When you look at the before-and-afters and the beautiful result that physicians are able to achieve, they immediately go to an understanding where they would operationalize it and place it into their practice, because they have the aesthetic eye and they have the aesthetic technique in the hands with an injectable in their hands. It's a beautiful opportunity for them to be able to address patients that they're not addressing right now. So I think the market size is a great opportunity for us, and the fact that there's not an injectable approved and this would be the first, I think creates an interesting opportunity for us as an organization.

[Jennifer Kim:]

Okay. Thank you.

[Patrick A. Barry:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of David Risinger with JPMorgan (sic) [Morgan Stanley]. Your line is now open.

[David R. Risinger:]

Yes. Hi. It's Dave Risinger from Morgan Stanley. Congrats on the very strong performance in the quarter. So I just wanted to better understand the trends in Generics. I think you've spoken about and your competitors have spoken about improving trends and improving prospects. Yet, for example, in the guidance today, I believe that you guided to the fourth quarter Generics being down 17% to 18% year-over-year, which is worse than the quarter that you just reported. The upside in the quarter resulted in U.S. Generics being down 13% year-over-year. So can you just help reconcile the guidance versus your commentary? Thank you.

[Paul V. Campanelli:]

So, David, I'll take the first part of that and maybe Blaise can put some specifics in. When we talk about the trends, I think we've been pretty clear of what we're saying here. And I don't want to have any mistake here, because people ask me about pricing in the generic industry, is pricing getting better. We're not saying pricing is getting better. What we're saying is, is that we're seeing stability; and stability meaning that we're getting back to, what I call, pre-2015 types of pricing pressures. We all know that we're in a commodities market. We all know that there's going to be erosion. So when you see the erosion within the portfolio, to me, what I'm trying to – I hope I'm clear, is that we're returning to a normal rate of erosion within a generic portfolio. It's not disappearing; it's just going back to where it once was, and it's not getting worse. So, specifically, maybe Blaise can add more color.

[Blaise Coleman:]

Yeah. Sure. So, David, just to reconcile that. When we look at Q3, we actually over-performed on Q3 in Generics than we anticipated. Paul explained that in the commentary that part of that was due to the colchicine performance. But we also saw a delayed competition on a number of our key products in that portfolio. And our guidance, at least the midpoint of our guidance implies that we'll see some of that competition materialize in Q4. So these are very specific product competitive events that we're expecting in there just we're moving out from Q3 into Q4.

[David R. Risinger:]

Okay. Got it. Thank you.

[Paul V. Campanelli:]

Thank you, David.

[Laure Park:]

Next question, please.

[Operator:]

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

[David A. Amsellem:]

Thanks. Just a couple of quick ones. So, first one, the injectables business.

[Laure Park:]

Hey, David. David, we're having trouble hearing you.

[David A. Amsellem:]

Can you hear me now?

[Paul V. Campanelli:]

Yes. Thank you.

[Laure Park:]

Yes. Thank you.

[David A. Amsellem:]

Okay. Sorry. Just a quick question on the injectables business, and specifically looking at the drug shortage list, I mean there's still quite a number of injectables that are on that list. So can you talk about the extent to which you're looking at being opportunistic regarding taking advantage of shortages and how that could affect the business? And then, secondly, and this is a broader question about your investment in brand assets. So, obviously, you're making an investment in medical aesthetics and cellulite, but can you talk more broadly about your willingness to expand upon the overall brand business? Some of your competitors in the generic space have talked about diversifying more into higher-margin brands. How much of that is part of your strategy, whether it's medical aesthetics or other therapeutic verticals? And can you talk to how that may play out over the next couple of years? Thanks.

[Paul V. Campanelli:]

Yeah. Sure. Thank you. So, Dave, the way – and I'll take the second question first. So, obviously, we're heavily invested in our Branded division. And the way we like to start out is we've reshaped this company, we've changed the portfolio, we are opportunistic, and we are agnostic, right? And I think we've proven that out here in how we're going about, whether it's an injectable program on the generic side or whether we're investing heavily into cellulite. Specifically, on the Branded side, I mean we get the question quite a bit is, is there going to be more to come on the medical aesthetics side. And the answer to that is we need to prove success, and I think passing the Phase 3 trial obviously is a big part of our ability to expand into that indication. I don't think it's needed. But if we find the right opportunity, we'll put another product in Pat's team's bag, right? That certainly is something that our business development team is going to continue to look for opportunities. I'm not going to limit ourselves to medical aesthetics. We've got a great urology sales force. We've got a great orthopedic group. So if we can find products that we can put into programs that will fit into NASCOBAL and SUPPRELIN or Dupuytren's or Peyronie's, we're always going to be opportunistic. That said, if you move back to the injectables question – no, actually before I go to the injectables question, I also want to make sure that we always remind people that we are focused. We're highly focused on debt paydown, right? So it's going to have to be something compelling to go forward. We're taking $190 million and we're acquiring Somerset, and we're heavily invested in the Branded side. If we find something, so be it. It's got to be compelling, but we're focused on debt paydown. On the drug shortage side, your question is, is would we be opportunistic. When I see drug shortages on the injectables side, I don't see that as an opportunity necessarily for a company like Endo/ Par's generic. Typically, when I see drug shortage, a lot of times it's because products are at a low cost or they're not profitable. I don't see going back and redeveloping a product that's in a drug shortage is something that's opportunistic. The way we're looking at it is on a go-forward basis. That's the way we're looking at Somerset. That's the way we're looking at our internal R&D right now. We're highly focused on technically challenging products in Paragraph IVs. And that really doesn't matter whether it's an injector product or a solid oral dosage. But I don't see our company going back in time on a drug shortage list to try to redevelop a product. Hope I answered your question.

[David A. Amsellem:]

Okay. Thank you.

[Laure Park:]

Next question, please. And if we can limit to one question, that would be great. Thank you.

[Operator:]

Okay. Thank you. And our next question comes from the line of Gary Nachman with BMO Capital Markets. Your line is now open.

[Gary Nachman:]

Okay. Great. Thanks. My question, another one for me on CCH. I know it's early, but any high-level thoughts yet on pricing to ensure a good value proposition for patients relative to the results that you saw that's obviously going to be crucial for uptake? I mean, we've seen other injectables that maybe didn't price appropriately that had more disappointing uptake. So how are you thinking about that at this point?

[Paul V. Campanelli:]

Yeah. So, Gary, I'm sorry, I think we've answered this a little bit. I'll add a little more color. We'll hand it back to Pat. But at this point in time, we're not adding color on pricing. I think that's going to come over time. We're focused now on the regulatory process and we want to get the application filed. We'll communicate our commercial strategy in detail as we get closer to launch. So, people are going to have to be patient. I think Pat's done a pretty good job of maybe showing some color on what the aesthetics market is. And maybe, Pat, you can address a couple of highlights back for Gary.

[Patrick A. Barry:]

Sure. Thanks, Paul. I mean, we obviously have some time to be able to set the price, and we've been giving it, obviously, a lot of thought up to this point. While we haven't determined price, we do understand that we want to be able to price appropriately to be successful in the aesthetic market. So we understand the space that we would play in in that injectable piece. But we also understand that we want to make sure that we're not undermining the value proposition of the disruptive innovation. So, more to come on that. Again, we would try to price for wide-scale adoption, both from a physician injector perspective, but also from a consumer adoption perspective.

[Paul V. Campanelli:]

Okay. Thank you.

[Gary Nachman:]

Okay.

[Laure Park:]

Next question, please.

[Operator:]

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

[Dana Flanders:]

Hi. Thank you for the question. Mine is just on the generic gross margin profile for your business. I saw you raised it to the mid-40s for the year. How should we just think about that trending longer-term? I know there's some competitive events across some of your bigger products, but you're also going to be launching some more complex ones getting into 2019 and 2020. So, should we think about this as just trending upwards, closer to 50%-plus over time? Or what's the right way to just think about the margin profile you can achieve? Thank you.

[Paul V. Campanelli:]

So, Dana, this is Paul. I'll start off and then I'm going to pass it back to Blaise. We're not going to get too deep into the future of the gross margin again. We'll provide guidance moving out in time in our normal cadence. That said, I'd just remind everybody, and we covered it in our prepared remarks, we have two exciting authorized generics in colchicine and ertapenem. And as most people understand, those are typically revenue-driven products with lower gross margin. That being said, it's always exciting to be a marketing distribution partner for a brand company when they need a generic distributor. So I'd just caution you as we look out with these two exciting products. With that, maybe I'll pass it over to Blaise.

[Blaise Coleman:]

Yeah. I think, Paul, you covered it well. Let me just say, Dana, that as we move forward, obviously, product mix, as you indicated, will be a key variable in terms of what that margin looks like. And as Paul said, we'll provide more guidance on that as we move into early 2019.

[Paul V. Campanelli:]

Thank you, Dana.

[Dana Flanders:]

Thanks.

[Laure Park:]

Next question, please.

[Operator:]

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

[Annabel Eva Samimy:]

Hi. Thanks for taking my question. So I'm just looking at some of the cash route that you have. You have the Somerset acquisition. You've still prioritized debt pay-down. You have $1 billion in cash, but you still have a lot of commitments and maybe some possible litigation overhang. So, I guess, now you're entering a consumer market with cellulite that's going to require heavy promotional activity to reach that customer. Can you talk about, I guess, your needs going forward and if you have the capital flexibility to launch this appropriately the way a consumer product needs to be launched? Thanks.

[Paul V. Campanelli:]

So I'm going to pass that over to Blaise with respect to focusing on our cash needs.

[Blaise Coleman:]

Yeah. I mean, listen, as you can imagine, as Paul said, we're planning for a success in aesthetics. We have full confidence in our ability to be able to invest in this the way we need to to be successful. We feel very comfortable with our cap structure. I think we've been very clear in terms of taking actions when necessary to create that operational flexibility. We have optionality in front of us. We have a fair amount of secured capacity. We do have cash on the balance sheet. Obviously, some of that cash is going to go towards finalizing the payments on our outstanding mesh liability and on completing the Somerset acquisition. But we feel we have the right operational flexibility to be able to do the things we need to do to grow the business going forward, including fully investing in the CCH opportunity.

[Annabel Eva Samimy:]

Okay.

[Paul V. Campanelli:]

Thank you, Annabel.

[Laure Park:]

Next question, please.

[Operator:]

And our next question comes from the line of Dewey Steadman with Canaccord. Your line is now open.

[Dewey Steadman:]

Hi. Thanks for taking the question. I guess, on Somerset, does that modest delay and shift into 2019 impact EPS guidance either positively or negatively for 2018? And how should we look at a full-year impact for that Somerset business from a revenue and EPS perspective? Thanks.

[Paul V. Campanelli:]

Yeah. Dewey, this is Paul. Again, we really haven't dimensionalized Somerset at this point in time. This is a very minor delay. I think you've got to look at it from that standpoint. I don't think we were – number one, it's not a huge driver initially. As I said, it's more near-term to medium term. So it's something that excites us. It is an R&D play, but it's not a long – we're not looking way out in the future. So I wouldn't view this as a material delay that would really impact us from an EPS or an EBITDA standpoint. More to follow when we provide color in 2019. Thanks, Dewey.

[Laure Park:]

Next question.

[Operator:]

And our next question comes from the line of Chris Scott with JPMorgan. Your line is now open.

[Unknown Speaker:]

Hi. This is Katarina on for Chris and just one more question on the CCH opportunity with cellulite. So, in a real-world setting, how durable would this therapy be for women? How frequently would patients need to get this treatment? Thank you.

[Paul V. Campanelli:]

Sure. Katarina, I'm going to pass it over to Pat, and he can talk a little bit about our Phase 2a and some of the things that we're doing.

[Patrick A. Barry:]

Yeah. Sure. In regards to durability, I think durability is an important attribute for injectables. And so, obviously, that's something that we are considering as we do our clinical development program and how we capture the data over time. (00

[Paul V. Campanelli:]

Thank you, Katerina.

[Unknown Speaker:]

Perfect. Thank you.

[Laure Park:]

Great. Next question.

[Operator:]

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

[Elliot Wilbur:]

Thanks. Good morning. Paul, I'm not sure I've ever heard a guy more excited about cellulite than yourself. (00

[Paul V. Campanelli:]

So, that's great, Elliott. I just can't wait to express my excitement. So I think the update is it's been pretty much established, right? So I think in August we actually lifted the stay with respect to compounding with the FDA due to a communication we had heard in the market of a potential compounder coming to market. We started to re-engage the FDA, and then back in September we agreed to stay the case once more until December 31 of this year. And I think, at this point in time, the prevailing wind is at our back. The FDA has recommended that VASOSTRICT is off the 503B category and there was at this point in time no justification of a clinical need and there is no drug shortage. As you know, comments were heard, and I think up until October 29, comments were submitted to the Code of Federal Register. They'll be evaluated by the FDA. And at this point in time, we feel bullish that the FDA will stay to their current position that VASOSTRICT should remain off of the 503 category B list. Thank you, Elliott.

[Laure Park:]

We need to have – the last question here.

[Operator:]

Okay. And our last question comes from the line of Irina Koffler with Mizuho. Your line is now open.

[Irina R. Koffler:]

Hi. Thanks for taking the questions. I was just wondering if you've had a chance to look at the cellulite data in more detail at some subgroup analysis and to determine if there's even better results possible for perhaps younger patients or thinner patients, and if we could be seeing that data later at medical meetings? Thanks.

[Paul V. Campanelli:]

Yeah. So, Irina, I mean right at this point in time, we only have top-line data. More data is forthcoming. Pat, can you add more color on that?

[Patrick A. Barry:]

Yeah. Well, actually, you hit on two important things. Number one, as Paul said, we just received the top-line data, we haven't received the complete data set. What I would also remind you of, what is particularly exciting is the breadth and depth of data that we're going to have.

[Paul V. Campanelli:]

Yeah.

[Patrick A. Barry:]

So, as we go through the data analysis and we get into next year and leading up to launch, we'll have an aggressive publication strategy and we will be looking for opportunities as early as next year to have major presence at the right aesthetic conferences to be able to release our data. So, to have the plethora of data that we think we're going to have at our fingertips is going to be really exciting, and that's one of the things that the key opinion leaders have expressed to us is an appreciation for the depth and richness of the science that we're putting behind this program. So we're really excited to be able to have some podium time at upcoming conferences at the right meetings next year and into 2020.

[Paul V. Campanelli:]

Thanks, Pat. Thanks, Irina.

[Laure Park:]

I think that wraps the Q&A, Paul.

[Paul V. Campanelli:]

Yeah. Thank you, Laure. Folks, we appreciate your continued interest and support of the company. We look forward to providing you all with updates as we move forward. I want to thank you all for joining us here this morning. Looking forward to our next conference call. Thank you, all, and good-bye.

[Operator:]

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