Endo International plc
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good day ladies and gentlemen, and welcome to the Endo International Third Quarter 2017 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Steve Mock, Senior Vice President of Investor Relations and Corporate Affairs. Sir, you may begin.

[Stephen J. Mock:]

Thank you, Shannon. Good afternoon, and thank you for joining us to discuss our third quarter 2017 financial results. Joining me on today's call are Paul Campanelli, President and Chief Executive Officer of Endo and Blaise Coleman, Executive Vice President and Chief Financial Officer. We have prepared a slide presentation to accompany today's webcast and that presentation, as well as other materials are posted online in the investor section at www.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 for Endo's reasons for including those non-GAAP financial measures in today's earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our earnings press release issued prior to today's call unless otherwise noted therein. I would now like to turn the call over to Paul.

[Paul V. Campanelli:]

Thank you, Steve. Good afternoon and thank you for joining us for today's call. I hope that you had a chance to review the company's earnings release that we issued earlier this afternoon. Endo is very pleased to report another quarter of solid operating performance. This performance resulted from strong operational execution in our core areas of focus and expected future growth. In the third quarter, Endo once again benefited from the impressive contributions of our Sterile Injectables and Branded Specialty products business units. Beginning on slide 2. Here's a brief agenda for today's call. Moving to slide 3. Again, we are very pleased with our third quarter operating performance. Strong growth in our Sterile Injectables and Branded Specialty portfolios and lowering operating expenses, including cost savings from previously announced restructurings, drove the increase in adjusted EBITDA and adjusted EBITDA margin, a key priority for Endo. We are reaffirming our 2017 revenue, adjusted EBITDA and adjusted diluted EPS guidance that we provided in August. We now expect to achieve adjusted EBITDA and adjusted diluted EPS that will reach the upper end of our 2017 guidance ranges. Blaise will discuss our financial guidance in greater detail later in the presentation. Moving to slide 4, you'll see a snapshot of our segment revenues for the third quarter. As expected, the previously communicated and by now well documented headwinds impacting the U.S. generics industry accounted for the overall decline in the U.S. Generic pharmaceuticals. Similarly, U.S. Branded pharmaceuticals overall performance was impacted by continued generic competition for established products, product divestitures and our ceasing shipments of OPANA ER. I'd like to point out that within each business segment, our core areas of strategic focus, Sterile Injectables and Branded Specialty products continue to grow by double digits. International Pharmaceuticals reflects of course the previously announced sale of Litha Healthcare Group at the beginning of the third quarter. Now, moving to slide 5. U.S. Generic pharmaceuticals declined 7% to $497 million in the third quarter. The decline in our base business was partially offset by strong double digit growth in Sterile Injectables. Year-to-date, U.S. Generics revenue grew 6% driven by strong performance of our Sterile Injectables portfolio and new launches and alternative dosages. In the third quarter, our base generics business declined approximately 27% compared to third quarter 2016, in line with guidance we provided in February. The third quarter performance resulted in part from the annualization of 2016 competitive events, 2017 competitive events, as well as product discontinuations. Price erosion in the third quarter continued to be in line with our expectations. New launches and alternative dosages declined 3%, as the impact of lower pricing on our LIDODERM-authorized generic was partially offset by the continued growth of potassium chloride liquid and powder, as well as new Sterile Injectable launches, such as ephedrine sulfate and neostigmine. We're also very pleased with the August launch of vigabatrin for oral solution and the encouraging results achieved so far. Finally, Sterile Injectables were powered by the continued growth of Vasostrict, as well as the increasing uptake of Adrenalin. Sales of Vasostrict reached $106 million, a 15% increase versus prior year. Adrenalin continued its momentum, achieving sales of $25 million in the quarter, a 33% sequential increase. Based on our strong year-to-date performance, we continue to project full year Sterile Injectables revenue growth in the low to mid 20% range. Now before moving on to the next slide, I know there is some level of uncertainty in the financial community around the durability of Vasostrict. I want to tell you that I am very pleased with our Vasostrict patent portfolio. We've succeeded in securing five Orange Book listed patents relating to Vasostrict, including three in the third quarter. And I note that we have not received a Paragraph IV notice letter with respect to any of those patents. Separately, while nobody can ever predict the outcome of litigation, I believe strongly in the merits of our pending lawsuits against QuVa and the FDA It is our firm intention to take whatever actions we consider necessary or appropriate to aggressively defend our Vasostrict product franchise and our intellectual property. Now, turning to slide 6. Year-to-date, Par has launched 14 products including two first-to-market products in the third quarter. We've also submitted non-regulatory filings this year. We expect approximately 20 launches and a similar number of regulatory submissions in 2017. Moving to slide 7. Let's discuss U.S. Branded Pharmaceuticals. We continue to be pleased with the strong growth across our specialty product portfolio. Branded Specialty product revenues grew 11%, driven primarily by XIAFLEX and other products within our specialty products portfolio. As expected, branded established products were impacted by the ceasing shipments of OPANA ER by September 1, the continued decline of our remaining pain products due to generic competition and the 2016 divestitures of STENDRA and BELBUCA. Overall, full year 2017 U.S. Branded Pharmaceutical revenues is expected to decline in the mid to high teens percentage range year over year. We continue to expect our full year Branded Specialty products and XIAFLEX revenue to grow in the high single to low double digits range. We are extremely pleased with the performance of our Branded Specialty products portfolio and believe additional initiatives, both executed and planned, will continue to grow that portfolio. Specifically in support of XIAFLEX, this year we made a commitment to consumer activation for Dupuytren's contracture and Peyronie's disease. Based on the metrics we have seen to date, the results of the initiatives have been very encouraging, and we believe indicate the potential for increased demand in both indications. We believe that these investments, along with our increased investment directed toward healthcare professionals are helping to drive our year-to-date double digit XIAFLEX sales growth. In addition to branded awareness campaigns, we continue to be committed to disease state awareness for both Peyronie's disease and Dupuytren's contracture. On September 26, we launched our Facts on Hand initiative partnering with four-time PGA Tour winner Tim Herron. The focus of this campaign is to educate and activate patients to seek nonsurgical solutions for Dupuytren's contracture similar to last year's Ask About the Curve PR campaign which was aimed at educating patients regarding Peyronie's disease. We feel that there is ample opportunity to continue to increase disease state awareness, as well as diagnosis and treatment rates for both indications. Lastly, we continue to be very excited about the opportunity to launch into aesthetics and believe that this represents an important milestone for our Branded Specialty strategy. We intend to initiate Phase 3 clinical trials in cellulite in the coming months. Our commercial team is already working on preliminary launch planning and we will be bringing in additional talent with aesthetics experience to complement our current aesthetics commercial team. Now moving on to slide 8. Let's briefly review International Pharmaceuticals. Third quarter International revenues of $56 million were down 20%, due primarily to the previously announced sale of Litha at the beginning of the third quarter. Paladin's third quarter performance increased 3% due to the continued uptake on Nucynta and XIAFLEX, as well as delayed generic competition on certain established products. Finally, the previously announced divestiture of Somar closed on October 25. We have successfully fulfilled our expressed intention to divest non-core assets and have delivered on our commitment to place Litha and Somar with companies that we believe can provide the attention and resources they deserve. We continue to expect 2017 International revenues to decline in the low 20s percentage range, reflecting the divestiture of these two business. Now let me turn the call over to Blaise Coleman to further discuss the company's third quarter financial performance and provide greater insight into our 2017 financial guidance. Blaise?

[Blaise Coleman:]

Thank you, Paul, and good afternoon everyone. First on slide 9, you'll see a snapshot of the third quarter GAAP and non-GAAP financial results. On a GAAP basis, we had a diluted loss per share from continuing operations of $0.45 in the quarter versus a diluted loss per share from continuing operations of $0.86 in the third quarter of 2016. GAAP net loss from continuing operations in the third quarter 2017 decreased to $100 million, compared to GAAP net loss from continuing operations of $191 million during the same period in 2016. This decrease includes the impact of lower amortization of intangible assets in the third quarter of 2017 and higher third quarter 2016 tax expense. On an adjusted basis, third quarter results were better than previously guided. Adjusted net income from continuing operations of $204 million and adjusted diluted earnings per share from continuing operations of $0.91 includes the impact of improved adjusted gross margin and lower adjusted operating expenses. Adjusted operating expense favorability was partly driven by approximately $12 million in the quarter of favorable changes in estimates. In addition, there was some shift in spending into the fourth quarter of 2017 and lower underlying operating expenses partly due to better than expected efficiency realization. We stated in the beginning of the year that one of our priorities is to drive margin expansion through operational execution and continuous improvement. Our third quarter adjusted results indicate the actions we have taken to date on this front are yielding tangible margin improvements. This brings us to our guidance on slide 10. We are reaffirming our full year 2017 revenue, adjusted EBITDA and adjusted diluted EPS guidance. Based on performance year to date and better than expected operating expenses, we now expect to be at the upper end of our adjusted EBITDA and adjusted diluted EPS respective ranges. The company's financial guidance is based on the assumptions noted on the slide. Lastly, in terms of projected cash flow on slide 11, we had $230 million in cash flow prior to debt payment in the first nine months of 2017 and now expect the full year 2017 cash flow prior to debt payment in the range of $310 million to $390 million. The increase in guidance is primarily due to favorable legal settlements and higher cash provided from changes in working capital. We continue to estimate our net debt to adjusted EBITDA leverage ratio to be in the high 4 times range year end 2017. Now, let me turn it back over to Paul. Paul?

[Paul V. Campanelli:]

Thank you, Blaise. Once again, I'm very pleased with another solid quarter of operating performance for Endo. Efficiency measures are yielding results and we remain committed to executing on our strategy laid out earlier this year. I'm proud of our vigabatrin first generic product launch through specialty pharmacies as our hybrid model allow for close collaboration and leveraging of expertise amongst our Par Generics, Par Sterile and Branded Specialty colleagues. I'm also pleased with XIAFLEX branded campaigns and our unbranded disease awareness campaigns targeting the untreated patient populations for Dupuytren's contracture and Peyronie's disease. Looking forward, we are excited to initiate Phase 3 trials in cellulite over the coming months. Over the past year, we have taken significant steps to reshape our organization. As we've stated, it will require time to ultimately get to where we want to be. Our priorities haven't changed and we've executed on what we said we would do. We are experienced at transformation not only as a company but also as a sector. Through this period of transformation, we will focus on those areas that we can control and we will continue to execute against our priorities. I firmly believe that if we are relentless in the execution of our plan over the mid to long term, we will be successful in creating value for our shareholders. Let me now turn the call back over to Steve to manage our question-and-answer period. Steve?

[Stephen J. Mock:]

Thank you, Paul. We'd now like to open the lines to your questions. 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. Shannon, may we have the first question?

[Operator:]

Thank you. Our first question comes from Liav Abraham with Citi. You may begin.

[Liav Abraham:]

Good afternoon. I have a question regarding margin trajectory. Based on our calculations, and correct me if I'm wrong, your full year 2017 guidance implies an uptick in cost expense as a percentage of sales in Q4. So maybe you can speak a little bit to that, and please correct me if I'm wrong. And how should we think about your gross margin and SG&A and R&D going into 2018? Thank you.

[Paul V. Campanelli:]

Liav, I'll pass it over to Blaise.

[Blaise Coleman:]

Sure. Thanks, Liav. Yeah, so in terms of our implied gross margin for Q4, it's actually flat with Q3. So, that's what we have in our implied guidance. As far as shaping going to 2018, Liav, we're not going to be providing any forward-looking guidance as it relates to 2018. Obviously as we've stated, one of our priorities is to continue to drive margin improvement, particularly gross margin improvement, as we move into 2018 and we're on track to do that.

[Liav Abraham:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Randall Stanicky with RBC Capital Markets. You may begin.

[Randall S. Stanicky:]

Great. Thanks. Paul, you and the management team have been delivering on the guidance that you've put forth. In fact you're pushing up on the higher end, and the stock continues to drop. So at what point do you step back and say, look, we put targets out there, we're hitting them, but it's just not enough given the environmental pressures, and step back with the board and say we need to take a more aggressive strategic approach just managing through these headwinds. And as an adjunct to that question, at what point does working with the industry to find alternative distribution, or working around the consortiums become a more meaningful part of that conversation?

[Paul V. Campanelli:]

Sure. Randall, so I think it's the question in terms of strategic optionality or strategic alternatives. As you would expect, we have a fiduciary responsibility. We're always out there looking for ways to create shareholder value. So, I mean we're very aware what's happening in the industry, what's happened over the last month or so. So that's always on the radar screen. But it has to be a correct fit, right. So at the end of the day, there's certain things that we control; there's certain thing that we don't control. We're not going to lose focus. We are laser focused on what we control and that goes back to operational execution. We are outperforming because we are doing what we said we're doing. We're going to file and we're going to launch. And I think we've got a good track record. We've proven it over the last, basically the last three quarters. I feel good about Q4, the way we forecast it. Regarding strategic alternatives, we're always going to be out there looking at ways to improve and until a perfect fit comes forth, we're just going to continue with what we control and that's executing on the portfolio, Randall. On the distribution side, if you're referring back to the pressures with the three consortiums, there's been a lot of questions on Amazon. I assume that's probably where you're headed. Today is where we are with three consortiums. They represent tens of thousands of retail pharmacies. They are partners who we need to understand how to work with them and continue to launch hard to manufacture products. That's our defense for the near term. If in the future and Amazon comes to the market, an opportunity to participate in that, that's going to be welcomed. Right, to have a once again, a fourth consortium, a fourth partner to sell into with new terms and conditions, with a fresh look, would be a welcome addition for a company like Endo. So I hope I answered your question.

[Randall S. Stanicky:]

Yeah. Thanks, Paul.

[Operator:]

Thank you. Our next question comes from Gregg Gilbert with Deutsche Bank. You may begin.

[Gregg Gilbert:]

Hi, guys. Couple, Paul, I know pricing is a very company-specific portfolio-specific thing to ask about, but if I could ask you more broadly to comment. I'm not asking you to call the bottom, and a big improvement here. But are you seeing signs that some of the pressures that have been hurting price for everyone, or at least getting less bad, if I could call it that? And secondly, about testosterone litigation, what would you outline as some of the key milestones as we look ahead? And how do you frame the risk for folks that worry that this could be another mesh-like liability? Thanks.

[Paul V. Campanelli:]

Okay so, Gregg, yeah. Hi. So in terms of the bottom and generic pricing, I mean it really kind of gets down to how much for – and for us, I'll be specific. I'm going to have to be specific to the Par Generic portfolio. It gets down to how much further do we really want to participate. So, we've made corporate decisions on people and facilities and products. So, there's areas that we're no longer going to be participating in. So, our defense again is going to be coming out with the hard to manufacture products. We have to move away and we are moving away from commodities where you're seeing those larger price points and those larger pressures. So, there's no surprises there. For us, we're basically calling out, we're at the bottom and we're not planning on going too much further. We'll see where the WBAD Econdisc Consortium leads next year, but there's not much room to go on a forward motion for Par. Regarding testosterone, I mean we're not going to be able to comment on ongoing litigation. You're well aware that the first MDL hearing started I believe November 6. It will play out. We've got our defensive strategy. At the end of the day, we're just not going to be able to comment on ongoing litigation.

[Gregg Gilbert:]

All right. Thanks.

[Operator:]

Thank you. Our next question comes from Andrew Finkelstein with Susquehanna Financial Group. You may begin.

[Andrew Finkelstein:]

Hi, good evening. And thanks for taking the question. I was hoping you could give a few more specifics about the product launches and submissions you expect before year end. I assume there's probably not a lot of specific products you'll name, but if you can give us, since I think it implies six more launches this year. Are these approved products or things with good visibility on approval? And then if I could ask specifically about generic CONCERTA, what your status is with that application and any thoughts on the stability or variability in the outlook for Voltaren Gel and the authorized generic as we think out over the next six to 12 months?

[Paul V. Campanelli:]

So Andrew, in terms of the remaining product launches, we're not going to specifically call them out. They're smaller products. We're not going to place ourself at a competitive disadvantage because some of these are first to market product opportunities. And we just don't want to put ourselves at risk here. So, but the way you should be looking at it, they're relatively small products but the company continues to execute. And forgive me, your second question was?

[Andrew Finkelstein:]

On CONCERTA and Voltaren.

[Paul V. Campanelli:]

So on CONCERTA, yeah I mean CONCERTA, we do have an application. It is a very, very difficult product to make as everybody is aware of. We're not going to highlight or put visibility on it. At this point in time, we just don't have clarity. And then on V Gel, your question was?

[Andrew Finkelstein:]

For the brand and the authorized generic, is that seen as stable over the next year or?

[Paul V. Campanelli:]

Yeah. So at this point in time, we don't have visibility to any real competitor absent of somebody coming into the market. I think you're going to see status quo with the two players plus the brand.

[Andrew Finkelstein:]

All right. Thanks very much.

[Paul V. Campanelli:]

Okay.

[Operator:]

Thank you. Our next question comes from Marc Goodman with UBS. You may begin.

[Marc Goodman:]

Yeah, the line item you call alternative dosages/new launches, can you just give us a flavor for the second quarter to third quarter movement down? I mean obviously, we would expect the ZETIA and the SEROQUEL to kind of come down a little bit, but it just seemed like the numbers came down a lot more than we thought. So, just help us with some of the movements. Like did the Lidocaine come down a lot more? Did potassium not do as well? Thanks.

[Paul V. Campanelli:]

Yeah, no, I think, Marc, you hit the nail in the head. It's the LIDODERM AG. We called that out in the script.

[Marc Goodman:]

How much down was that?

[Paul V. Campanelli:]

About $10 million, Marc.

[Marc Goodman:]

Thank you.

[Paul V. Campanelli:]

But I think that answers your question.

[Marc Goodman:]

Yeah. And then just a follow-up to the question that was just asked about pricing, and then you responded, we'll see how WBAD Econdisc works out next year. Are you basically saying it hasn't really kicked in yet, we haven't had negotiations yet? Where is that? What did you mean by that?

[Paul V. Campanelli:]

So, I think, there had been some initial requests coming from both Econdisc and WBAD. So there was some initial, what I call calibration or equalization. That was part, when we called out 27% base erosion, that included that. So, we feel good with respect to this equalization of portfolios. What I meant by next year is time will tell whether they plan on having a portfolio bid like a Claris One or is this it. So, time will tell. We have not had any feedback or communication. What I will say is I don't believe that the generic sector is going to support too deeply another round of bids considering we just came out of a round with Econdisc in July and we really finished up probably less than a year ago with Walgreens. So, it's going to be a very interesting 2018.

[Marc Goodman:]

Thanks.

[Operator:]

Thank you. Our next question comes from Chris Schott with JPMorgan. You may begin.

[Chris Schott:]

Great. Thanks very much. Just two questions here. First maybe on XIAFLEX in cellulite. Can you just elaborate a bit since we're getting close to starting the Phase 3, just in terms of the size of the study, the duration of the study, any major changes in the way you are approaching this relative to that successful Phase 2b data that you had earlier this year? And the second question was just coming back on the base business, that $600 million or so of annualized revenue. How profitable of a business is that for the company at this point? So, as we're thinking about sales erosion going forward, is there still a lot of margin associated with this or we are kind of reaching a point where the profitability is kind of elsewhere in the portfolio? Thank you.

[Paul V. Campanelli:]

You want to take that one?

[Blaise Coleman:]

Yeah. Hey, Chris. It's Blaise. On the second part there, that second question. It is meaningfully below our gross margin that we've got it to for the generic segments in 2017.

[Paul V. Campanelli:]

Yeah, and we didn't disclose the number of patients that we have now. So, I think right now in terms of the XIAFLEX trial, Chris, we haven't disclosed the specific number of patients. I think right now what we say, it's going to be similar in nature to the Phase 2. I mean, and we're still discussing the overall Phase 3 program with the FDA. So we're going to ask for a little patience, but we feel good about it, but we're still in discussions with the FDA.

[Chris Schott:]

Great. Thanks very much.

[Paul V. Campanelli:]

You're welcome.

[Operator:]

Thank you. Our next question comes from David Risinger with Morgan Stanley. You may begin.

[David R. Risinger:]

Thanks very much and thanks for all of the color and comments. I wanted to ask actually a high level follow-up question. So, it's not that I'm trying to be negative or not be supportive, but Paul, when you say the industry won't support much lower pricing, the thing that comes to mind is that U.S. generic margins are still higher than they are ex-U.S. And so, I guess you've taken action to exit certain products that are unprofitable and I think some other industry players have exited a very small number of products. But my question is, do you think the industry will take action to exit a larger percentage of volume and SKUs in the country such that the Street can see more clearly exiting which causes pain for the buyers when they can't get the supply that they need?

[Paul V. Campanelli:]

Yeah.

[David R. Risinger:]

And then second, more specific, more specifically to Endo, the cellulite opportunity is quite exciting. There's been a lot of speculation for years that Endo would partner with an aesthetics company to help to fund development and commercialize in a significant manner. Could you just speak to whether that is still a possibility on the table or whether you're currently planning on going it alone? Thank you.

[Paul V. Campanelli:]

Okay so, David, in terms of the high level on the generic side, my statement is very broad. I think there's a couple ways that I'm looking at it. I don't believe that the measures that Endo has taken regarding Par is isolated to only Par. I think other companies are dealing with products and people and plants. And when you make those decisions, you don't just come back and turn it back on. Right, so when you look at a lot of – and I'll speak for a lot of U.S. manufacturers, when you're producing product primarily in the U.S. and you make these decisions, it's very difficult just to come back into a product, and I think when you walk away from a product, you're sending a message. You may have some offshore companies that are looking to drive on volume. But these price points are getting to the point where they're so slim that while you can say that the margins are still high, it's ultimately, it's hard to grow your business in that regard. I think and it wouldn't surprise me that you start to see drug shortages come out in the future on commodity products that you might have seen 10 years ago because the price pressures that you're getting from some of these consortiums. That's just my view. I think it's a possibility. Regarding cellulite and partnering, I think I've been pretty clear. We're always going to be open to optionality. We will talk to folks or people that will talk to us and want to partner with us to be able to maximize XIAFLEX or CCH as we're calling it for cellulite. Of course we're going to listen, but it has to be fair. At this point in time, we are incredibly excited about the Phase 3 trial. We are in the process of recruiting talent to bring the product forward. And all I can tell you is we are planning for success.

[David R. Risinger:]

That's very helpful. Thank you.

[Paul V. Campanelli:]

Thank you.

[Operator:]

Thank you. Our next question comes from Irina Koffler with Mizuho. You may begin.

[Irina Rivkind Koffler:]

Hi. Thanks for taking the question. The opioid litigation tends be pretty scary to people. And quite frankly, I just wanted to see if we could just get our arms around what it is that the range of risks is. And so, is it just off label marketing on your branded opioid products such as OPANA and Percocet over a particular period of time? Is it something else? Is it something more punitive or criminal? Can you kind of help us understand a little bit more and put it into buckets?

[Paul V. Campanelli:]

Yes.

[Irina Rivkind Koffler:]

So that's the first question. And the second question is on XIAFLEX, are you still coming out with a different formulation? And if so, will you need to do any sort of bridging work before you start your Phase 3? Thank you.

[Paul V. Campanelli:]

So, Irina, I think simply put on the opioids, we are headed into pending litigation. With that respect, we're not going to be able to speculate and it's not our policy to comment when we're moving towards litigation. Your specific question on what the allegation is, in terms of marketing practices. That's out in the public domain, so that's known. Regarding XIAFLEX, the formulation is basically, I would say it is a new formulation. It's a bit different that was used in the Phase 2b, but I do not believe that there's going to be any bridging requirement.

[Irina Rivkind Koffler:]

Okay, thank you.

[Paul V. Campanelli:]

You're welcome.

[Operator:]

Thank you. Our next question comes from David Amsellem with Piper Jaffray. You may begin.

[David A. Amsellem:]

Thanks. So, just a couple on the injectables business. So, just going back to Vasostrict, obviously you have IP and your patents in the Orange Book, but is there anything beyond just IP that you can – any reason why you would think you have not been certified against on P4. I mean is there something inherent about the product beyond just the patent protection that we should be aware of that might be a barrier for generics? And then just secondly on Adrenalin, when do you think we might see companies that exited the market come back? Amphastar alluded to filing on their adrenalin vial product. They exited the market but they're looking to come back. So I wanted to get a sense for when you think competition may start there. Thanks.

[Paul V. Campanelli:]

So, on Adrenalin, we already have a Paragraph IV filed. So, with respect to that, we already know that we're in litigation with one company. Anybody that wants to make a submission and come forward on Adrenalin outside of the intellectual patent, intellectual property as filed in the Orange Book patent, you have to file a Paragraph IV. We are obviously aware that there is a company that had filed an application before our Orange Book patent was listed. And there's no barrier there. So, and I think we've been pretty clear with that. And as I indicated, Hospira had filed a Paragraph IV and we're in litigation. So, if any other company and the company that you named wants to come forward on Adrenalin, they will have to file a Paragraph IV. Regarding Vasostrict, your question I believe was how do I know if somebody hasn't notified me. At the end of the day, the process is, if you're going to file a Paragraph IV and you've made a submission at the FDA and you are challenging the patents, you have to make a notification of a Paragraph IV. So, there's a period of time that it has to come back to the innovator, in our case us, and we would be notified. We've got five Orange Book patents listed. We've got 11 pending applications that will also enforce our intellectual property. So we feel very confident in that regard and we're saying at this point in time, nobody has noticed Endo regarding Vasostrict.

[David A. Amsellem:]

Thank you.

[Operator:]

Thank you. Our next question comes from Elliot Wilbur with Raymond James. You may begin.

[Elliot Wilbur:]

Thanks. Just a couple of quick follow-ups. Paul, appreciate you calling the bottom in the generic pricing cycle, at least for yourself. With respect to that though, obviously while things may not get much worse, deflation is still very elevated. And just wondering if you think this is kind of the new norm or whether or not we're at some point in time and hopefully not so distant future, we'll actually see deflation levels ease. And then follow-up to the Amazon question earlier, Teva owns a captive distribution business by the name of Anda which has about 10% share of the market. And earlier today the other generics, Paul, suggested that his company may also look at owning a captive distribution network as a way to get more direct control over product going to patients and obviously capture more of the margin. Is that something that you guys would consider at some point in time? Thanks.

[Paul V. Campanelli:]

Yeah. So Elliot, regarding the distribution question, of course we would consider it, but we have to be very careful here, as I said. And we all know the situation. The consortiums represent tens of thousands of pharmacies. When you make that decision, you better be prepared for pushback. At the end of the day, we all know the math and the consortiums are controlling 91%. So, while I have a lot of respect for Anda and smaller distributions, they represent right now tenths and halves of percents. So, again I'm being – I'm the master of the obvious here. When you take that turn and make that decision, you best be prepared for what could occur. So, you need a very diverse and strong portfolio. Would we consider it? Sure. But you better be ready to back it up. Regarding the deflation question, we don't know the answer to that definitively. I can only hope and speak for Par. There's just, frankly there's not much more room for where we're going to go. We're looking forward. We're looking at bringing new products to the market that are hard to manufacture and that's our strategy and that's our defense. Thank you.

[Operator:]

Thank you. Our next question comes from Annabel Samimy with Stifel. You may begin.

[Annabel Eva Samimy:]

Hi. Thanks for taking my question. So, I understand that the impact on the alternative dosage forms was really LIDODERM and we're obviously seeing some downturn from SEROQUEL and ZETIA. But can you tell us whether alternative form which we typically saw as a more protected class as falling into some of the same dynamics that you see in the base business? Have you seen more competitors into this area? And should we see some of these trends going forward? And then separately on XIAFLEX, do you have any kind of breakdown? Or can you give us a sense of the breakdown between Peyronie's and Dupuytren's? And Dupuytren's is an older indication, so how much of an impact can this new awareness campaign generate? Thanks.

[Paul V. Campanelli:]

Yeah. So, Dupuytren's is, we feel that actually Dupuytren's is a growing indication for us, right? So, regarding the demand of vial growth, we're seeing volume increases of around 7%, so we feel pretty good about that. For the quarter, I think we saw Peyronie's specifically grow about 10% and we saw Dupuytren's grow about 2%. So year to date, we called out the 7% overall growth. Then with respect to the other question on the alternative dosage forms, the other area that we had some pressure was on, in addition to LIDO, was on both forms of just the potassium powder.

[Annabel Eva Samimy:]

And so, what does that mean going forward?

[Paul V. Campanelli:]

Ultimately, if we take on more competition, there's nothing stopping anybody with respect to coming to the market on either the powder or the liquid, and we've called that out and we've said that from previous conference calls that those 505(b)(2)s behave like sole source generics but there's no intellectual property holding back competition. So, those products could receive competition at some point in time.

[Annabel Eva Samimy:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Dana Flanders with Goldman Sachs. You may begin.

[Dana Flanders:]

Hi. Thank you very much for taking the questions. My first, just on the decision to sue the FDA preemptively on Vaso compounding. And I know you referenced this in your prepared remarks. It's not something we see as often, so just could you talk a little bit about what went behind that decision? And did something happen or change to make you feel like you needed to take that action? And then secondly, on the international business. A lot of progress you've made reshaping it. Are you done at this point, or is there still action you plan to take going forward? Thank you.

[Paul V. Campanelli:]

Dana, on the international side, I mean at this point in time, it's a very small part of our business. So, I think we've done a great job of putting Somar, Litha into better owners' hands to grow those businesses. But in terms of what remains in Canada and a little bit in the UK, I think these are so small at this point in time, we've got bigger challenges that we're focused on. So this is not our highest of priorities. Regarding the decision to bring a suit against the FDA, I would tell you that was a painstaking decision, and a lot of thoughtful, mindful approaches went into communicating and attempting to dialogue with the FDA. So, I do agree with your statement in terms of it's not something that you see that much. We exhausted every means possible to resolve what we think is something that is incredibly unlawful. To take a product that we spent millions of dollars on to develop to bring to a market under an NDA, and then have a category one compounder come to the market where the requirement is to fill out a page and a half application with no notice period, without any definition around the medical need, was something that was unacceptable to us and we needed to have a dialogue. It didn't happen and we exhausted company means, political means, and ultimately after a period of time went by, we need to protect our intellectual property and our product. And that's why we went forward against the FDA. Thank you.

[Operator:]

Thank you. Our next question comes from Gary Nachman with BMO Capital Markets. You may begin.

[Gary Nachman:]

Hi. Good afternoon. I wanted to come back to the spending levels that were a lot lower than we expected. Could you review what that favorable change in estimates was and where are the additional efficiencies coming from, what areas are you scaling back on? And then Paul, any new updates on mesh, any new cases that have surfaced? Are you comfortable enough with that situation where you would consider doing some bolt-on deals if those opportunities presented themselves?

[Paul V. Campanelli:]

So, I'll take the first. I'll take the last question. I'll let Blaise handle the financial question. Regarding the mesh question, I guess the easiest way to comment on is frankly, I just don't have an update. And I think that's, and that's good news. So when we talked about last quarter the accrual, there's just nothing material to talk about. So, we feel pretty good regarding that. Regarding your comment on bolt-on deals, that's a question that we're going to make a little bit later this year, early next year. We've got to look at what type of cash that we end the year with. We always talk about delevering. We're laser focused on that. But if we find a small deal that make sense in areas that we're highly focused on, whether it's aesthetics or injectables, that something that we will strongly consider as well. But I don't want to leave you with a wrong impression. We are committed to being laser focused on delevering. With that, I'll pass the next question to Blaise.

[Blaise Coleman:]

Yeah, sure. So, Gary, on the spend question, the favorability we saw in Q3 and then you're seeing play through in terms of our full-year guidance, a piece of that is what we mentioned up front, which is we had some favorable changes in estimates in Q3 pf about $12 million. And that's in OpEx and that's playing through in the quarter and that's going to play through on a full year basis. The other piece we have is around just the timing of spend in the quarter and how that's moving forward into Q4. And the last element in terms of underspend, true underspend is in two areas. One is around legal spend, so our legal spend can be a bit lumpy and we're seeing that change for the year. We have some savings there. And then also just from a selling and marketing standpoint, we're going to see some favorability as well. The last component we mentioned is around efficiencies and we did see some realization a little bit quicker on some of our efficiency initiatives that we have going on that we realized in Q3. And that's going to contribute to the full-year benefit as well.

[Gary Nachman:]

Okay. So, those are good run rates going forward, both SG&A and R&D?

[Blaise Coleman:]

Well listen, Gary, I'm not going to give you anything right now in 2018 in terms of what we're going to do, but we'll give you that guidance during the year-end call.

[Gary Nachman:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Louise Chen with Cantor. You may begin.

[Louise Chen:]

Hi. Thanks for taking my questions. First question I had was why haven't we seen more pushback from generics companies to these consortiums? It sounds like now you're getting to that point, but why hasn't there been up to now? And then secondly, is the potential entrance of a player such as an Amazon positive or negative for the generics industry? And particularly on pricing, how do you think about that? Thanks.

[Paul V. Campanelli:]

So Louise, I'll start with the second question on Amazon. As I said before, any time that you can bring another major buyer into the sector, I'm going to view as favorable, right. So that opens up competition. That's just another outlet. I think that's the way I would look at it initially. And in the future, you'll just have to look at what types of terms and conditions that would result of that. Now, I would tell you that the three other consortiums aren't going to just allow that to happen. And we see what's already happening in the market and I think we're all aware of the CVSs and the Walgreens making communications about increasing their 24-hour delivery services. So at the end of the day, they're going to try to put themselves in a position to compete against Amazon as you would expect. But whenever you have an ability to go to another major buyer in the generic industry, that's a positive. And then your first question, I apologize, was? We didn't hear so well.

[Louise Chen:]

Yeah. Why haven't we seen more pushback from the generic drug companies on these consortiums and their pricing?

[Paul V. Campanelli:]

So pushback from the consortiums, at the end of the day, they're controlling 91% of the market. They're controlling tens of thousands of pharmacies. So whenever you have multiple players in a product and somebody is willing to lower price, you have to decide whether you want to stay in a product and compete and that's what has obviously occurred here. In our particular case, we've made certain decisions on commodity products where we've decided we can't compete or we don't want to no longer compete, and hence we made decisions on people and products and facilities. But to answer your question, as long as there's multiple players in a product and they're willing to drop price, that is very difficult to push back on the existing consortiums as we know today. And you have a record number of ANDA approvals coming and a lot of those record ANDA approvals are not first time generics. These are on older ANDAs. So, there's plenty of new products, I'm sorry, plenty of new ANDAs coming to market on older products. Thank you.

[Operator:]

Thank you. Our next question comes from Douglas Tsao with Barclays. You may begin.

[Douglas Tsao:]

Hi. Good afternoon. Thanks for taking the questions. Just first in terms of the generics business. I mean when you look at your portfolio, Paul, in terms of some of the hard decisions that you've sort of referenced, do you feel like at this point you've sort of gotten out of the products that are most vulnerable? Or when you look through your book, are there some, in terms of some of those pending ANDAs at the FDA that could be a little problematic? And then just a second question, in terms of the Sterile Injectables. You've had some, a lot of success with Vasostrict and obviously capitalizing on the FDA's unapproved drugs program, but there has been called out in some of the recent drug pricing hearings as having some unintended consequences. And does that potentially change how you look at those as an opportunity for the company and the investment you want to make behind them? Thank you.

[Paul V. Campanelli:]

Yes. So, Doug, the answer to the second question. It does. And I think the way you have to look at it is we have a 505(b)(2) strategy. We feel good about it. We're going to continue with it. But you have to be thoughtful and mindful on how you price things today. I think that's very important. But you have to take into consideration that it can be incredibly costly to take an unapproved drug, do the requisite clinical trial work, submit an NDA, pay the PDUFA fee, and if you're going to pursue intellectual property, the cost that comes with it, knowing that you're maintaining in our case a sterile injectable facility in the United States. That comes with a price. But you've got to be mindful and thoughtful on how you price products, and that's always been the case. When we look at our generic portfolio, I would tell you that, your first part was, would we look at our commercial products. I think that's probably where you were headed. We've made tough decisions already on commercial products. Going forward, I would say that we're probably in a normal course process where every quarter, every six months, you're always looking at your portfolio. So, there's probably going to be a handful of ins with product launches and a handful of outs, but nothing, nothing along the scale of what we've gone through over the last year. Regarding the R&D, a similar question. We have about 100 products on file with the FDA. So you're going to have a similar question there, that not every product is going to fall into a perfect category. And we'll have to be very thoughtful and mindful that, do we want to enter into a market with four, five, six competitors. And that just there may be a percentage of our portfolio, as you would expect with anybody, that you're going to fall into that category. And we'll make some decisions at the time of product approval. We may or may not go forward with a handful of smaller commodity type products. But I want to leave you with the soundbite that we're pursuing, for the most part, difficult to manufacture products. That's the focus of the R&D side of Par. Thank you.

[Stephen J. Mock:]

Shannon, that's going to have to be our last question. Paul just has a few closing remarks.

[Paul V. Campanelli:]

Thank you, Steve. Before we conclude, I do want to thank our dedicated employees for their hard work and commitment to our company. I'd also like to thank our investors for their patience and continued support. We appreciate your continued interest in our company and we look forward to providing you with updates. Thank you for joining us this afternoon and good evening.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.