Endo International plc
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Endo International Plc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference 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. Please begin.

[Laure Park:]

Thank you and good morning. Thank you for joining us today to discuss our fourth 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 US 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 US 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 the 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'd now like to turn the call over to Paul.

[Paul 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 fourth quarter 2018 earnings presentation. Now beginning on slide 2. Here's a brief agenda for today's call. Moving to slide 3, approximately two years ago, we outlined a strategic vision for Endo and laid out our key strategic priorities. We articulated a clear vision in which we aspire to be a highly focused generics and specialty branded company, delivering quality medicines to patients in need through excellence in development, manufacturing and commercialization. We also told you that this represented a multi-year turnaround plan. I am proud of the significant progress that we've made towards our goal. To recap, we simplified our company through centralization and unification and these actions have also served to drive productivity improvements. We've created the new Endo culture that is customer focused and performance driven with a relentless commitment to flawless operational execution. We transformed our legacy US branded pharmaceutical business, focused on pain into a highly focused US branded specialty pharmaceutical business with best in class commercial capabilities. We divested non-core assets and businesses and we repositioned our US generics business by executing a comprehensive product portfolio and manufacturing footprint rationalization initiative. Through these actions, we've been able to drive margin improvement, make targeted investments to further enhance our capabilities in the development of high barrier, technically challenging generic products and reallocate resources to our core growth areas, US sterile injectables, our specialty products portfolio of our US branded specialty and established pharmaceutical segment and the development of CCH and cellulite, including the recent successful completion of our CCH cellulite phase 3 trials. Recognizing the progress that we've made today, we believe we have now established the right foundation to transition to the next phase of our plan. As we make this transition, our three core strategic priorities are unchanged, as is our commitment to operational execution, expanding our portfolio and capabilities to drive growth and our goal of expanding adjusted EBITDA and de-levering to the three to four times over the -- range over time. What has evolved are the next set of specific steps that will move us forward in our journey to becoming the company we aspire to be over the long term. In this context, we have taken and will continue to take a long term approach in terms of how we manage the business with a laser focus on methodically executing against our strategic priorities. I am pleased with what we've accomplished today and I'm excited for 2019 as it represents a critical transition year into the next phase of our plan. I remain fully confident in our team and our strategic focus as we move forward together. Now, moving to slide 4, from a total enterprise perspective, we are pleased to report year-over-year quarterly revenue and adjusted EBITDA growth. The 2% revenue growth versus the same period last year was primarily attributable to continued strong growth in both our US branded sterile injectable segment and in the specialty products portfolio of our US branded specialty and established pharmaceutical segment. Our fourth quarter performance also reflects a 5% growth in adjusted EBITDA when compared to the fourth quarter of 2017. We saw continued progress in our pipeline and investments. This was highlighted by positive top line and secondary results from two phase 3 CCH clinical trials for the treatment of cellulite. We are continuing with our regulatory and pre-commercialization activities and we expect to submit a BLA in the second half of 2019. And if approved, launch commercially in the second half of 2020. Blaise will walk you through our full year 2019 financial guidance later in our presentation. Moving to slide 5, you will see a snapshot of our segment revenues for the fourth quarter. We experienced continued strong growth in both our US branded sterile injectable segment and the specialty product portfolio of our US branded specialty and established pharmaceutical segment in the fourth quarter, which was partially offset by competitive pressures in the US generic pharmaceutical segment and the divestiture of Somar, our former Mexican business. In addition to the continued strong underlying performance of our core areas of growth, the fourth quarter increase in these areas reflects a benefit from timing of shipments compared to the prior year. On a sequential basis, total company revenues increased by 5% to $786 million from $745 million in the third quarter of 2018, which represents our third consecutive quarter of sequential revenue growth. In the fourth quarter of 2018, we also reported adjusted EBITDA of $344 million compared to $327 million in the fourth quarter of 2017. The increase was due to lower adjusted operating expenses. Now moving to slide 6. Our specialty products portfolio of our US branded specialty and established pharmaceutical segment continued to advance in the fourth quarter with year-over-year growth of 15%. This was largely driven by the significant growth of our XIAFLEX franchise, which grew 30% in the fourth quarter compared to the fourth quarter of 2017. This year-on-year growth reflects continued strong underlying demand and a benefit from timing of shipments compared to the prior year. Additionally, NASCOBAL grew 12% in the fourth quarter versus the fourth quarter of 2017 and Aveed grew 36% in the fourth quarter compared to the prior year. Needless to say, I'm extremely proud of our specialty branded commercial team’s accomplishments. In 2018, XIAFLEX full year revenue growth of 24% doubled the rate of XIAFLEX in 2017 revenue growth. This accelerated XIAFLEX growth rate has been driven by our focused execution and continued investment in our integrated commercial strategy. This includes expanded consumer awareness and activation for both our Peyronie's and Dupuytren's Contracture indications. Based on the continued strong underlying fourth quarter XIAFLEX revenue growth, we expect full year 2019 XIAFLEX revenues to grow in the mid to high teens percentage range and full year 2019 Specialty Products portfolio revenue growth in the low double digit percentage range. The established products portfolio of our US branded specialty and established pharmaceutical segments performance reflects ongoing generic competition. Moving to our CCH development program for assessing the treatment of cellulite, we are extremely pleased with the positive results from the phase 3 trials. We are preparing for success on this front through the enhancement of our commercial capabilities, which leverage new talent with medical aesthetics experience and by building on our existing branded specialty capabilities. Looking forward, we will continue with our regulatory and pre-commercialization activities and are targeting a market launch in the second half of 2020. Following our efforts in 2018, we plan to build upon our market presence, attending another 25 to 30 congresses and medical meetings in 2019. We expect data readout throughout the year and in fact we are excited that this Saturday, one of our study investigators, Dr. Joely Kaufman will be presenting phase 3 data at the American Academy of Dermatology conference in Washington, DC. Now turning to slide 7. Our US branded sterile injectable segment continues to deliver with sales growth of 32% in the fourth quarter of 2018 versus the fourth quarter of 2017. This performance was driven by growth of ertapenem for injection, the authorized generic of INVANZ with sales of $32 million. Also contributing to the revenue growth were ADRENALIN with sales of $42 million in the quarter, a 60% increase versus the same period in 2017 and VASOSTRICT with year-over-year sales growth of 22% in the quarter. Our sterile injectables fourth quarter growth also reflects a benefit from favorable year-on-year channel inventory changes, reflecting the significant level of channel inventory de-stocking experienced in the fourth quarter of 2017. Looking forward, we expect 2019 US branded sterile injectable revenues to grow in the high single to low double digit percentage range with VASOSTRICT revenues expected to grow by a low double digit percentage. Turning to our US generic pharmaceuticals on slide 8. The performance for the segment during the fourth quarter versus the same period in the prior year primarily reflects the impact of competitive market pressures. This performance was partially offset by strong performance of colchicine tablets, the authorized generic of COLCRYS, which was the result of the first to file paragraph IV settlement agreement. As we noted at JP Morgan Conference in January, we expect 2019 to be a transitional year for our US generic portfolio. We’ve started seeing competition materialize on a number of our larger margin contributors and we expect key higher generic launches to be in late 2019. In this context, we expect our full year 2019 US generics revenue to decline in the mid to high teens percentage range. Moving to slide 9, as expected, our international performance reflects the divestiture of Somar in the fourth quarter of 2017. For the full year 2019, we expect international pharmaceuticals to decline approximately 20% compared to full year 2018, mainly due to the impact of generic competition on our business in Canada. Now turning to slide 10. We shift focus to our diverse pipeline. The positive results from Phase 3 CCH for cellulite clinical trials positions us to pursue an exciting untapped market in injectable treatment for cellulite. We have additional real world CCH studies in development focused on dosing, injection technique, and responses in target patient populations. Additionally, we continue to have optionality with CCH to develop new indications. In the fourth quarter, we launched 3 new products, bringing the total number of generics and sterile injectable new product launches to 10 for 2018. We plan to launch approximately 15 new products in 2019 across our US branded sterile injectables and US generic pharmaceuticals segment. Our branded sterile injectable pipeline is supplemented by strategic relationships with third parties, such as Nevakar, which will potentially provide five differentiated 505 V2 hospital in critical care based products. Now, yesterday, we announced that we made the decision to terminate our agreements to acquire Somerset and Wintac. While we worked diligently to complete the transaction, certain regulatory approvals in India have taken longer than anticipated and we do not have clarity on when those approvals could be received. There are no penalties or other payments associated with terminating the agreements. Notwithstanding the termination of Somerset Wintac acquisition, we will continue to be opportunistic in pursuing promising external opportunities that are aligned with our stated corporate goals. The table on the bottom of slide 10 shows some of our key disclosed future first to file or first to market opportunities. Now, let me turn the call over to Blaise to further discuss the company's fourth quarter financial performance and 2019 financial guidance. Blaise?

[Blaise Coleman:]

Thank you, Paul and good morning, everyone. First, on slide 11, you will see a snapshot of the fourth quarter GAAP and non-GAAP financial results. Paul covered company and segment revenues earlier. So I will not read that again. On a GAAP basis, we had diluted loss per share of $1.18 from continuing operations in the quarter versus the loss of $1.22 per share in the fourth quarter of 2017. GAAP operating loss in fourth quarter 2018 was $150 million compared to GAAP operating loss of $304 million during the same period in 2017. The reduction in loss was driven by an overall reduction in operating expenses, including the impact of lower litigation related charges and R&D expenses, partially offset by higher asset impairment charges. On an adjusted basis, the fourth quarter adjusted net income of $175 million and the adjusted diluted earnings per share from continuing operations of $0.75 exceeds the upper end of our implied fourth quarter financial guidance range provided in November. The better than expected fourth quarter performance was driven by higher net sales across each of our segments, lower adjusted operating expenses reflective of lower G&A spend and a faster ramp down in R&D spend post the completion of the CCH for cellulite phase 3 clinical trials in early November. In addition, our fourth quarter adjusted effective tax rate was lower than expected, primarily due to favorable adjusted pre-tax jurisdictional earnings mix. Partially offsetting the better than expected fourth quarter performance was a lower than expected adjusted gross margin due to unfavorable sales mix, reflective of the strong top line performance of our largest authorized generic products in the quarter. Slide 12 provides a summary of Endo’s 2019 full year financial guidance. We expect 2019 total revenues in the range of $2.76 billion to $2.96 billion. The midpoint of our revenue guidance range implies a low single digit decline versus 2018 revenue. This implied decline primarily reflects the expected decline in our US generic segment, driven by the annualization of 2018 competitive events, anticipated 2019 competitive events for several of our key US generic products and the expected timing of our new product launches that are skewed towards the latter part of 2019. This expected decline of our US generic segment is significantly offset by the expected continued strong growth in our US branded sterile injectable segment and US branded Specialty Products portfolio. We expect adjusted EBITDA to be between $1.24 billion and $1.34 billion and adjusted earnings per share to be between $2 and $2.25. Please note that the company's guidance is based on the following assumptions. Full year 2019 adjusted gross margin of 65% to 66%, our adjusted gross margin assumption midpoint versus 2018 adjusted gross margin primarily reflects the shift in sales mix driven by the full year impact of the authorized generics we launched in the third quarter of 2018 and the impact of competitive events to a number of our higher US generic segment margin contributors. We expect adjusted operating expenses to be between 24.5% and 25% of revenues. This assumption reflects continued investments in our core growth drivers, including an expected increase in our selling and marketing investments versus prior year in support of our successful XIAFLEX integrated commercial strategy and execution of our CCH for cellulite pre marketing activities. These anticipated increases in investment are expected to be more than offset by reductions in G&A expense versus prior year, driven by the benefits of ongoing cost reduction initiatives and lower expected spend for certain corporate matters. In addition, we expect R&D costs to be lower versus prior year, primarily as a result of the 2018 completion of our CCH for cellulite phase 3 trials. We expect adjusted interest expense of approximately $550 million to $560 million. In terms of our adjusted effective tax rate, we've previously communicated in early 2018 that we expect it to maintain at low teens adjusted effective tax rate in the midterm based on the newly passed US tax reform and assuming a static jurisdictional mix of adjusted pre-tax earnings. We also communicated at that time our expectations to maintain a modest level of cash tax over the mid-term based on the expected utilization of certain tax attributes. During the latter part of 2018, we took additional actions to further reduce our expected cash tax over the mid-term. As a result of these actions, our jurisdictional mix of adjusted pre-tax earnings changed from what we previously projected and we expect our 2019 adjusted effective tax rate to be in the 17.5% to 18.5% range. However, based on our cash tax focused strategy, we expect a low level of cash taxes in 2019 and over the midterm period. In terms of our 2019 share count, we assumed full year adjusted diluted shares outstanding to be approximately 230 million. Although we do not provide specific quarterly guidance, we expect the split of total enterprise revenue, adjusted EBITDA and adjusted earnings per share to be more heavily weighted to the second half of 2019, due to our expected revenue, adjusted operating expense and adjusted effective tax rate cadence. The higher anticipated second half 2019 revenue reflects the expected timing of 2019 new product launches as well as the expected drag on our first quarter 2019 revenue, as the fourth quarter 2018 stocking benefit noted earlier unwinds. We expect the drag on first quarter 2019 total revenue to be approximately $15 million to $20 million. In terms of our operating expenses, we anticipate the first quarter to be our highest quarter of spend in 2019, mainly due to the timing of certain corporate related expenses. We expect the first quarter 2019 adjusted effective tax rate to be the highest quarterly rate, well above our full year estimated adjusted effective tax rate range, due to jurisdictional mix within the quarter. Moving to slide 13. This is a summary of the segment and product specific guidance previously discussed. Advancing to slide 14 and wrapping up the financial discussion, for full year 2018, we had $197 million in cash flow prior to debt payment, which is higher than we guided to in November. This favorability resulted primarily from higher cash provided from changes in working capital, higher adjusted EBITDA, significantly lower mesh settlement payments into the qualified settlement fund due to timing and the unplanned proceeds from the sale of our Huntsville facility received late in the fourth quarter. We ended 2018 with approximately $1.1 billion of unrestricted cash, and a net debt to adjusted EBITDA leverage ratio of approximately 5.2 times. As we look forward to 2019, we expect the use of cash, prior to debt payment, in the range of approximately $75 million to $175 million. This assumes approximately $460 million in payments into the mesh qualified settlement fund and from mesh related expenses. $120 million in non-mesh settlement payments primarily related to our previously announced [indiscernible] and CRT product liability settlements and $545 million in interest payments. Now, let me turn it back over to Paul. Paul?

[Paul Campanelli:]

Thank you, Blaise. We are proud of the many achievements to date and the steadfast focus of our teams to execute on all levels. We've taken and will continue to take the actions needed to become the company we aspire to be. We believe that our focus on enhancing our capabilities in sterile injectables and our US branded Specialty Products portfolio, including medical aesthetics positions us well for the future. 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 the strategic priorities. I am grateful to all of our Endo colleagues for their commitment and hard work. 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 within the hour, we would appreciate it. Operator, may we have the first question?

[Operator:]

[Operator Instructions] Our first question comes from Chris Schott of JP Morgan.

[Chris Schott:]

The first one I had just was talking about biz dev priorities beyond the Somerset announcement from last night, should we think of more assets of that scale that could make sense for the company? Or was that more of a one-off opportunity? And then just a quick second one, was just wanting a little bit more color on OpEx as a percent of sales. Hoping if you are stepping down in 2019, if I think obviously 2020 and beyond, should we think about that trend starting to move back up as we think about the infrastructure for the cellulite indication, et cetera starting to come on board, I’m trying to get a better sense of where that ultimately kind of shakes out longer term for the company?

[Paul Campanelli:]

I'll take maybe the business development and I’ll hand it over to Blaise. I think in terms of the business development opportunities, when I look at the Somerset deal that we were in, it was probably at the upper end of where we're probably focused in terms of acquisition price. I would tell you though, when we go out from a business development standpoint, we are very agnostic in terms of where we can generate potential value. So if we were to find something, whether it was on the specialty side or in the sterile side, that really wouldn’t make too much of a difference to me. If there are small bolt on deals which would fit well with our core strategy, we would continue in that regard. The generic side, I will tell you, we have a lot of resources from a development standpoint. So that would probably be less of a likelihood, but at this point in time, I would keep it open to both the specialty side and the injectable side. And I'll pass it over to Blaise.

[Blaise Coleman:]

Sure. So Chris, just in terms of the OpEx profile, in our guidance for 2019, as a percent of sales, you do see the midpoint of our assumption range to be lower than what we saw for full year ‘18 and we spoke a minute ago about what the drivers of those are, we continue to fully invest on the selling and marketing side that we are seeing further efficiencies on the G&A side and we're seeing the step down in R&D spend, primarily related to the wrap up of the Phase 3 trial for cellulite. We're not – Chris, we're not going to guide in terms of what we think the profile is going to be going forward. Clearly as we’ve talked about, we're going to continue to fully invest in what we need to do to be successful with the launch of the cellulite indication and we will continue to invest against our priorities from an R&D perspective. We obviously also will continue to drive continuous improvements and look for cost efficiencies. So more to come on that, but those will be our priorities moving forward in terms of how we invest.

[Operator:]

Our next question comes from Randall Stanicky of RBC Capital Markets.

[Randall Stanicky:]

Paul, can you maybe comment on the generic environment? Is it getting better, staying the same and specifically when you look at your generic gross margin guidance last year, you were looking at mid-40%, this year, low to mid-30%. Can you talk about the pushes and pulls in there, is there authorized generic impact? Ultimately, I'm trying to get a sense of where do those gross margins on the generic side normalize that going forward?

[Paul Campanelli:]

Yeah. Thanks, Randall. I mean I think you hit the nail right on the head, I mean, the starting point, we have the culture scene authorized generic. That was part of a paragraph IV. So, I mean, at the end of the day, that was a product that was developed by par. So I put that a little bit to the side, but needless to say, it does pull down our gross margin percentages. On [indiscernible] side, that would be a traditional marketing agreement with Merck where we’re looking for a distribution partner. So clearly that really has a drag on the GM percentage, but we will continue to take those deals and pursue them as we have historically. So those -- that's going to ebb and flow. That's the bottom line. In terms of the pricing environment, and we get that question quite a bit, is pricing getting better in the generic industry, pricing is not getting better, but what's happening is clearly we are stable right from what I like to refer to the pre-2015 timeframe, where you're getting the rovers and you're getting requests for price reductions. It's more a stabilized environment. So from that standpoint, we're able to manage, we’re able to be able to predict those types of request and we're better positioned actually to defend against them rovers. So from a normalization standpoint, it's a harder question to answer, because it also deals if we’re successful with future paragraph IVs. So again, we're probably at this point at the light percentage, given that our generic launches are towards the latter half or late into 2014, but as we started late fourth quarter 2018, ’19 -- late fourth quarter 2019. But as we -- we have more successes in paragraph IVs, then I would anticipate gross margins on the generics to increase once again.

[Randall Stanicky:]

Should we think about that mid-30% level being roughly, on the generic side, being roughly stable or consistent throughout the year or is there a back end versus front end weighting?

[Blaise Coleman:]

Yeah. As we launch those new products, Randall, we would expect to see that weighting increase through the second half of the year.

[Operator:]

Our next question comes from Liav Abraham of Citi.

[Liav Abraham:]

Paul, I understand you're not providing guidance beyond 2019, however, based on the pushes and pulls that you're seeing over the longer term, can you kind of contextualize the 2019 EBITDA, is this in your view a trough year from which we can potentially see growth going forward. And then on the tax rate, on the reported tax rate, is this 17.5% to 18.5% weighing just as – is this the new run going forward?

[Paul Campanelli:]

Yeah. So in terms of it being a trough year, it's really difficult to predict right now. I think for today, we're going to have to just to stick to our position for 2019. There's so many uncertainties that we are dealing with on a daily basis, on a go forward basis. We are preparing for success with cellulite, which we're hoping that we will be expecting to launch in the back half of 2020. So that's certainly going to help us, as we look out into the future. We have our fair share of generic launches that we've placed on the slides that we're incredibly excited about, but it's just hard to predict when our competitors come to the market, it's hard to predict FDA timings specifically with the shutdown that we're dealing with. So I think for today, we're going to just have to comment on 2020. I'll pass it over to Blaise on the second question.

[Blaise Coleman:]

Sure. So on the effective tax rate, we do expect over the midterm, our adjusted effective tax rate to be in the mid to high teens. But what's very important is that from a cash tax perspective and our focus here is on driving cash generation, we expect that to be lower than what we previously projected it to be going forward. So very important that we understand we're focused on cash taxes, we believe that will be lower than we anticipated going forward. However, there's a trade off on the adjusted effective tax rate where we're going to see that in sort of the mid to high teens.

[Operator:]

Our next question comes from Dana Flanders of Goldman Sachs.

[Dana Flanders:]

Thank you for the questions and congrats on all the progress. My first one is just on core XIAFLEX growth. We've obviously seen that really accelerate this year. Can you just remind us where we are on penetration in DC and Peyronie's and just how you think about the levers you still have to continue to drive that level of growth going forward? And then just my quick follow-up, just appreciate the detail in the presentation on cash flows. Can you remind us when you expect the mesh and just the non-mesh legal settlement payments to end? Is 2020 a normalized cash flow year or does some of that still trickle over to 2020?

[Paul Campanelli:]

Sure, Dana. Thank you. So I'm -- we're going to pass the XIAFLEX question over to Pat and then Blaise can certainly talk about the financial question regarding mesh. But I'll just start by saying on XIAFLEX, we are incredibly proud of what Pat's team has done with respect to both the Peyronie’s and the Dupuytren's indications, keeping in mind that Dupuytren's really launched in 2019 and Peyronie’s, the Peyronie’s indication launching three years later. So I'm going to pass it over to Pat to give a little bit more color on how we think we can grow this.

[Pat Barry:]

Yeah, definitely. Thanks, Paul. Let me address your question on market penetration, starting with Peyronie’s. When that decision to treat is made, the XIAFLEX is garnering almost 60% market penetration at this point. So we're doing very well from a market penetration perspective. But what we're excited about on the come is the fact that the diagnosis rate is still sitting around 2% or 3% and the overall treatment rate is only 14%. So that's why we've been focusing in on consumer activation and disease state awareness, because we feel like there's an opportunity for sustainable growth and it's a similar pattern on Dupuytren's contraction or when that treatment decision is made, we're getting about one out of every four patients. So there's room to grow there, which we're optimistic about. But again, we've got treatment rate, diagnosis rate of about 3% and treatment rate of about 30%. So at the top of the funnel, we've got opportunities to generate potential growth and that's why we've been focused on a branded consumer activation and also unbranded disease state awareness.

[Blaise Coleman:]

Dana, on your question regarding mesh and non-mesh settlements and the cash call, in our guidance, the mesh cash call assumes the full payout of the remaining liability in 2019. So at this point, we would not expect any additional payments beyond that for mesh. On the non-mesh settlements, the vast majority of the cash call on those settlements are also assumed in our 2019 guidance and it will be a small carry over related to those into 2020.

[Operator:]

Our next question comes from David Risinger of Morgan Stanley.

[David Risinger:]

So I have a couple questions. First, with respect to VASOSTRICT, could you talk about the product’s revenue prospects, and then just update us on the news flow to watch with respect to the FDA and potential competitive developments. And second, I think, Paul, you had mentioned a while back that the company is planning to enter the topical generic market and is currently building a facility. Could you just update us on that, including the timing the facility will be able to ship products and when we'll be able to see a meaningful revenue contribution from topicals. The final question, I'm sorry for one more, but you had mentioned a stabilized environment. Could you just put some sort of framework around what that means, a lot of generalists think that means flat sales or prices year-over-year, and I constantly have to answer questions about what companies mean by stable and stabilized. But I'm pretty sure that you mean that those -- that that represents single digit declines and pricing year-over-year, but I'm not sure. I don't know if it means low single digit, year-over-year price declines or high single digit year-over-year price declines. So if you could just put some parameters around stabilized, I would appreciate it. Thank you.

[Paul Campanelli:]

Sure. David, so let me see if I can tackle a few of these before you and Blaise can certainly jump in. I think starting with the VASOSTRICT question with respect to revenue prospects, I think what we're simply saying and we put it in our prepared remarks, at this point in time, we are seeing very small single digit growth with respect to utilization and then we take an appropriate annual price increase. And I think that's the way you really should be looking at VASOSTRICT on an ongoing basis. But I think it's also important just to remind everybody that the demand is actually going up in low single digits. The question son the topical facility, there must be a disconnect there, that's not something that's tied back to par. We don't have any construction on top of this. We do have some small topical capabilities already in our facility, but we're not focused on building out. What we do have is an expansion in India and solid oral dosage and we are also considering injectable expansion in India. That would help us in the future with respect to our sterile and generic capabilities, but nothing on the topical front. With respect to generic stabilization and I want to be careful, I’ll start and then I'll maybe -- I'll pass it over to Blaise. We want to be careful, because if we're not going to go down the road of looking at our base business erosion, I don't think that's exactly your question, but we're not going to go down that path in terms of how we look at it, because we do put ourselves at a competitive disadvantage when we start communicating these types of things. But, maybe I'll just pass it over to Blaise to add a little color.

[Blaise Coleman:]

Yeah. So David, when we're asked general generic environment questions, we give general generic environment answers. And when we're asked specific company questions, we give company specific answers. So in this context, our commentary is that we've seen the underlying trends in the US generic stabilizing is simply us saying that the consortium driven pricing pressures we face over the last 12 to 18 months have moderated to a certain degree. Now that -- what has not moderated, but it's actually intensified for us specifically is the product specific competition for certain of our key products that we've talked about and these competitive pressures are less driven by consortiums and more driven by normal generic market dynamics. We just happen to have a number of products with limited competition that are now in markets that are becoming more competitive. So, as we look at our US generic portfolio, has also seen a significant number of product discontinuations and is also seeing a temporary low point in terms of new product revenue due to the timing of our pipeline opportunities. So, in summary, we can see stabilizing overall pricing in US generic environment, but we do have so many idiosyncratic factors specific to our portfolio at this certain point in time. So, again, we have a very healthy generics portfolio and pipeline going forward. As Paul mentioned earlier, it's a transition year for us and we see more significant opportunities for us late in 2019 and beyond that will help us move that business forward.

[Pat Barry:]

And David, I want to ensure I understood one of your question. Did you -- were you specifically asking about the paragraph IV update with VASOSTRICT? Was that your question?

[David Risinger:]

Sure. That would be helpful. Thank you.

[Pat Barry:]

Sure. So I guess at this stage of the game, I think everybody is aware that the first to file notification was received back almost a year ago in April of 2018. That was on a one ml presentation. I think pretty much everybody is aware that we also received a notice on the 10 ml, which was back in June of 2018. And I think maybe the last component that's probably most important is that there is a scheduling order for both the AND applicants and the bench trial which is scheduled now for May of 2020. So that's the timeline associated with that.

[Operator:]

And our next question comes from Irina Koffler of Mizuho.

[Irina Koffler:]

So just going back to the generic pricing, one of your competitors mentioned that in the US, the stable headwind is about mid-single digit pricing headwind. So outside of the idiosyncratic factors from this year, should we expect this to be the more normal range for your just regular oral generics business? And then a follow up question is on the international, I didn't catch why we're looking at a 20% decline in 2019 and maybe you can comment on that going forward as well. Thank you.

[Paul Campanelli:]

So I'll take the international question. I think it's just very simple where our Paladin business in Canada is predominantly a branded business and there was a couple of key products that received generic competition. So I think that's the reason of the decline in Canada. And then, Blaise?

[Blaise Coleman:]

Yeah, and again, we're not commenting on any expectations around what pricing erosion looks like for us during the industry. And Paul's comment on why we don't want to make comments around that, so we’re just going to have to let that topic stand there.

[Operator:]

And next question comes from Ami Fadia of Leerink.

[Ami Fadia:]

Paul, as you think about the generics and the sterile injectables pipeline that you've got and some of your commentary around a stabilization in the pricing environment, how do you see the lineup of your pipeline impacting the growth trajectory of the business in the next couple of years. Do you think that we have visibility into the business, especially the generics part of the business being flat to growing in either 2020 and 2021? And then with regards to your 2019 guidance, can you elaborate on the percent of the portfolio on the generic side, or give us more color on a product basis as to where you see competition coming in, in the back half of the year? Thank you.

[Paul Campanelli:]

So, I’ll take the first question. When you look at the generic business, there's no surprises here, right. Generic retail business remains a choppy business and it always has and it always will continue to be and that's, I mean, that's -- there's an exciting component to that and there's a challenging component to that as well, right. So, as you pick your products and you select your products, there's always going to be challenges of being able to pinpoint entry dates. We are a paragraph IV company, there's always going to be a component of we're going to win cases, we're going to lose cases, we're going to settle cases. So it's always going to be difficult to pinpoint with accuracy beyond where we are right today. So what we get excited about is when we place product stuff on the slide here, like [indiscernible] these are products that we can talk about that we're excited about that have date certains and that's always going to be a major component to our business. However, the growth driver moving forward where we can really look and point to is going to be on specialty portion of Endo as well as counterpart, Tony Paris, running our injectable business, that's an area that we're going to continue to invest in. That's an area that we've been able to truly expand and have many successes beyond VASOSTRICT and ADRENALIN and we're excited about a paragraph IV settlement on teduglutide that we’re able now to talk a little bit about, that's where you're going to see us focus a little bit more on a go forward basis. And Blaise?

[Blaise Coleman:]

Sure, so on the competitive landscape question, our guidance takes into account two things. One, the competitive events that happened in 2018 and the annualization of that into 2019. It also, as we stated, takes into account potential competitive events that we can see in 2019. We're not going to get into product specific assumptions around that, but our guidance takes both of those into account.

[Operator:]

Our next question comes from Gary Nachman of BMO Capital Markets.

[Gary Nachman:]

First on CCH for Cellulite, what sort of pre-launch activities you plan on doing this year? Have you been talking to potential partners, whether in the US or outside the US and are you looking to bring other derm products in to try and maybe build some infrastructure ahead of the CCH launch. And then just quickly on NASCOBAL, based on IQVIA, it accelerated significantly in 4Q, continued in January? You called it out, Paul. So, what drove that and is that sustainable going forward? Thanks.

[Paul Campanelli:]

Yes, Gary. Maybe I'll take maybe the first part of that question. And I'll hand it over to Pat. In terms of -- Pat will talk about the pre-launch activities. In terms of partnerships, I think we've been pretty clear that we’re always listening, we're always out there in the case of optionality, if there's somebody that wants to partner with us in the US, we certainly will always listen if that's a way that we can maximize the asset. I've got that fiduciary responsibility to do so. But absent of that, we are planning for success. And in a second, Pat can tell you a little bit about what we're doing in 2019 and as we lead towards the expected launch of success in 2020. That said, we do have international rights. We've talked about that in the future that when appropriate, we would look to partner, we've had initial discussions with certain companies that could maximize it from an ex-US standpoint. But clearly the focus is preparing for the regulatory success in the US and then we would parlay that into the potential territories in Latin America and hopefully Europe as well. And with that, I'll pass it over to Pat to talk a little bit about the commercial activities.

[Pat Barry:]

Yeah, great, thanks, Paul. As Paul mentioned, I mean it's exciting times in 2019, is early to CCH I cellulite. The R&D team is working very hard on to ready ourselves for the submission of a BLA in the second half of 2019. So that's a major milestone for us. As far as commercially and what we're doing both commercially and scientifically, we're continuing to expand our introduction of Endo aesthetics, we will be attending probably approximately 25 major meetings, in similar fashion to the AAD coming up this weekend. We feel like given the disruptive innovation that CCH and cellulite represents that will garner a lot of podium time. So we're excited about Joely Kaufman releasing the Phase 3 results this weekend. So we've got an aggressive publication strategy in 2019 where we can begin to disseminate data. We will also be continuing to work with our key opinion leaders to generate real world data and that's generating a lot of excitement. We've made the right strategic hires with medical aesthetic experience that you would anticipate from companies that you would recognize. So we've got our commercial head on board, we've got our head of marketing that has a strong consumer background on board, which will be important to CCH and we've made a couple of other strategic hires. So we're really building out the commercial infrastructure from a sales and marketing perspective that also we benefit from the fact that we also have an internal structure to drawn from our existing branded specialty organization, so we're excited about having this other channel that we can build off of. As far as key activities, obviously beyond building out the commercial plan from a marketing perspective, we've done a lot of segmentation work, we're sizing the market, obviously a pricing decision will be a big one for us and will be again to zone in on the right price point, we will be finalizing our branding and packaging work, the brand naming we're excited about that is right on track to complement our regulatory submission and then we will be building out our framework around both our branded positioning and our unbranded positioning in the marketplace and really putting ourselves in a position to really accelerate that buildout in 2020.

[Paul Campanelli:]

And then Gary maybe just to add a little color, you asked a question on NASCOBAL, when you look at what Pat’s commercial team has done, just with XIAFLEX, with Dupuytren's indication launching really nine years ago and the Peyronie's launching six years ago, NASCOBAL launched 10 years ago, in 2009. So it's just an amazing -- an amazing position that we can continue to grow these older assets. But maybe we'll talk a little bit about the zero copay.

[Pat Barry:]

Yeah, I apologize. I missed that one. Yeah, so we’ve seen strong growth of NASCOBAL as Paul said, we've got a focus in the bariatric segment, and we put a zero copay offering for our commercial payer patients and that’s been really well received or removed any patient out of pocket barriers and our sales team has done a terrific job of executing really strong messaging around NASCOBAL. And we're really proud of the fact that we grew that product at 14% year-over-year.

[Operator:]

Our next question comes from Gregg Gilbert of SunTrust.

[Gregg Gilbert:]

First for Blaise. I was hoping you could quantify the effects of the shipment timing that you called out on VASOSTRICT, sorry, on XIAFLEX and whether that affected other products? And then Paul, a strategic question. When you first announced the Somerset deal, you pointed to filed applications for injectables as well as a sterile injectable facility in India. So I'm wondering if those are still key strategic priorities for you and do you see opportunities out there to address those externally or if you just turn those efforts inward, or will it be a mix of both.

[Paul Campanelli:]

Sure. I'll take the latter question. So, sure, I mean, while we're disappointed with Somerset, we remain incredibly excited with Nevakar deal. And there's always potential to expand that existing relationship. In terms of small injectable deals, there are -- there certainly are a series of other companies and products that we could potentially acquire, so that strategy is going to remain intact, we're excited about that. And then the comment about injectables, we are -- we have a robust and an aggressive injectables program that we want to continue to invest in. As I said, it's a core part of our growth, so I don't see any change in that regard. So maybe a bump in the road with Somerset, but we remain pretty excited with Nevakar and other potential acquisitions that we’re evaluating currently. And I'll pass it over to Blaise.

[Blaise Coleman:]

Sure. So Greg, in terms of the stocking question, we had noted on the call -- during the script that we would expect to see about a $15 million to $20 million drag in Q1 related to that item. And of that, about $5 million we expect to be related to XIAFLEX.

[Operator:]

Our next question comes from David Amsellem of Piper Jaffray.

[David Amsellem:]

Just a couple. So I wanted to drill down on business development and you talked about focusing on specialty and injectables, but within specialty, can you elaborate on what areas you're looking at and I apologize if I missed this before, but what areas are you looking at, what you're prioritizing and then also what your wherewithal is, given the capital structure? And then secondly, with injectables, I know, you talked about toggling more towards 505(b)(2)s and more complex product, can you talk about your capabilities now and kind of aspirationally, what you're thinking about in terms of what you want to add in terms of capabilities within sterile injectables going forward. Thanks.

[Paul Campanelli:]

Sure. So David, maybe the first question with respect to business development in focus, I mean I think I started the question by indicating that we are agnostic. When I say agnostic, we also have to be a bit true to ourselves in terms of our strengths and where we are today. So clearly, on the specialty side, having indications for men's health would be a -- clearly a focus that would make sense. We have obviously other indications that we can pursue with XIAFLEX. That's an R&D question. So it's a balance between men's urology from in-licensing. We also have to think about potential R&D that we can do with XIAFLEX for the future. I also get a lot of questions about would we aggressively go after another medical aesthetics product for the portfolio and I think the way Pat and I really look at it is at an appropriate time, we will or consider it. I think we've got a lot to execute on the current CCH path. We'd like to prove success, we have the expectation of filing, we have the expectation of launching, we have to get that behind our back or under our belt. That would clearly become area of focus. A couple of other points, in terms of your question on the cap structure, I'll leave that to Blaise in a second. Maybe I'll just move over to the 505(b)(2) capabilities. I think when you look at our company, we have unified and centralized our R&D groups. We have a lot of talented individuals that have shown success, both on our specialty and our injectable side. Long history, when you look at the portfolio, ACS, NASCOBAL, ADRENALIN, VASOSTRICT, these are all 505(b)(2)s, the Nevakar is all 505(b)(2)s, right. So when you look at the internal capabilities and again, we have the same team that's helping us develop BLA. So I think we have a lot of in-house capabilities to bring the right type of products forward. So if there is a 505(b)(2)s that we want to file, whether it's on a solid oral dosage side, the injectable side or the BLA side, we're going to be agnostic. We have the talent to be able to develop and file those with our own in-house talent. And with that, I'll pass it to Blaise with the cap structure.

[Blaise Coleman:]

Yeah. So, David, just in terms of your question around our wherewithal, I would just first say our ultimate path to success lies in our ability to grow EBITDA and that's really building the portfolio we need for the future and our capital allocation priorities are aligned to that goal. Now, just in terms of funding our capital needs and our ability to achieve that goal, we ended the year with about $1.1 billion, $1.2 billion of unrestricted cash. Based on our cash flow guidance, we expect to see a use of cash somewhere between $75 million to $175 million in ‘19 and that's fully funding the remaining cash call on our mesh liability. So based on this outlook, we would expect to exit 2019 with somewhere around $1 billion of unrestricted cash, we will be in a position to generate meaningful positive cash flow as we enter 2020 and we also have available secured capacity. So we feel good about our current level of operational flexibility. We’re always assessing to see if there are other ways to increase that flexibility, but we feel good about where we are and the things we’re targeting.

[Operator:]

Our last question comes from Louise Chen of Cantor.

[Louise Chen:]

One question I had was, we get a lot of thoughts on people on this opioid litigation trial that's coming up. I don't know if the date has been changed. But last we checked was September 3. So just curious, what are your expectations here and how can you help us think about the potential liability to you? And then second question on CCH and your data presentation this weekend. Maybe if you could give us a little bit more color on what you plan to present. And then one of the pushbacks that we've gotten is that it looks like the data were not as strong as some people had expected. And just curious if that will be enough of a data to drive uptake and also for people to come back for their additional treatments. Thank you.

[Paul Campanelli:]

So this is Paul. I'll take the opioid question and I can then maybe pass it over to Pat. So clearly the -- so what had previously been communicated was that there was a bellwether case that was scheduled for September. The judge in fact, it push that out to, I believe October 21. So that is a change, that is track one. I think it's important to know that in track one, the defendants are not yet known actually who is going to be specifically in track one. So to answer your question, bellwether case got pushed from September to October. We still do not know whether Endo or who any of the defendants are going to be in track one and that's pretty much the -- we're not going to be able to quantify when we're -- that's something that we're not going to do. We always like to say that we've had discussions and if there's a way to settle, that's always something that we would consider. But at this point in time, we need to be prepared to go to trial, if we are part of track one. With that, I'll pass it over to Pat to talk about CCH.

[Pat Barry:]

Yeah, sure. We're very excited about the AAD and we anticipate a lot of play at subsequent meetings throughout the year. So again, it will be a comprehensive review of the phase 3 data, making sure people understand the differences between phase 3 and phase 2, which you mentioned. So I want to definitely address that. And some of the sub analysis that we've seen, maybe taking on the question of the data, in fact the data has been remarkable. I mean, again, it's important to understand that it's a largest cellulite trial, have a very stringent endpoint. Despite that, it did meet the endpoint. The main differences between the phase 3 and the phase 2, on the phase 3, there were no restrictions on BMI or no restrictions on cellulite severity. So it's not really an all comer trial with a very difficult patient population, yet it's still met its primary endpoint 15 of the 16 secondary, it’s truly remarkable. When you look at the patients within the normal BMI range, which is the stratified data that we will be able to disseminate going forward, in fact, those patients did much, much better and actually did slightly better than the Phase 2 results. So the phase 3 results in those normal targeted BMI patients, the result was actually slightly better than the Phase 2. So that's the type of nuances that you'll see going forward, as we disseminate data. In relation to your KOL question, based on the discussions today with our investigators and our KOLs, they're very excited about the data, especially when they look at the one grade and two grade improvement as characterized by the before and afters and we've consistently heard that -- they believe it to be an impressive result and they feel like there's a lot of patients that would line up quickly for it, probably likely the aesthetically experienced women within a normal BMI active lifestyle who has cellulitis and is bothered by cellulite happens to be a lot of patients by the, way they feel like those would be first in line for us, so we feel like there's a big market potential for CCH in cellulite once approved.

[Laure Park:]

Thank you. I guess that's our last question.

[Operator:]

At this time, I'd like to turn the call back over to Mr. Paul Campanelli for closing remarks.

[Paul Campanelli:]

Thank you. Simply said that we truly appreciate your continued interest in the support of the company and we look forward to providing you with updates as we move forward. Thank you for joining us this morning and goodbye.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. You may disconnect. Everyone, have a wonderful day.