Endo International plc
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Endo International Plc Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference Mr. Steve Mock, SVP, Investor Relations & Corporate Affairs. Please go ahead, sir.

[Stephen J. Mock:]

Thank you. Good morning, and thank you for joining us to discuss our fourth quarter 2016 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 Investors section at www.endo.com. I would like to remind you that any forward-looking statements made by management are covered under the Private Securities Litigation Reform Act of 1995 and Canadian Securities Litigation Act 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. I would now like to turn the call over to Paul.

[Paul V. Campanelli:]

Thank you, Steve. Good morning and thank you for joining us for today's call. I presume that most of you have had an opportunity to review the company's earnings press release that we issued earlier this morning. Let me now turn to our fourth quarter 2016 earnings presentation. On slide two, we begin with a brief agenda for today's call. Now before we commence with the review of Endo's fourth quarter performance, I will first address the activity we have been engaged in since I assumed the role of CEO in late September. As many of you know, over the past few months, Endo has undertaken an overall assessment of our company's strategy in its asset and product portfolios. Through this assessment, our management team developed a multi-year plan for our company. This necessitated a realistic examination of Endo, our current industry environment and where we are headed over the next several years. In conjunction with our annual goodwill and in-process R&D impairment testing, we developed a revised company-wide long-term forecast taking into consideration the realities of our current external environment. The revised plan reflects a lower estimated fair value for certain reporting units and intangible assets. This change in estimated fair value ultimately led to significant impairment charges being recorded during the fourth quarter. Blaise will address these charges in greater detail later on this morning's call. While the impairment charges reflect an accounting valuation of assets acquired in the past, our multi-year plan represents our forward looking strategy. Importantly, we've already begun to execute on a number of our plans, underlying initiatives and priorities. In this regard, moving to slide three, we have defined three key priorities. The first is to reshape our organization for success. We've put in place a new executive leadership team that possesses a demonstrated track record of success. We have centralized and streamlined Endo's global supply chain, quality and compliance organization in order to create a more cohesive and efficient structure to support both our generics and branded businesses. Additionally, we announced the restructuring of our corporate and branded pharmaceutical R&D function. Importantly, we named Terry Coughlin to be Endo's Chief Operating Officer. As a result, we now have an operating leader with visibility into all of our business units which we believe will allow us to achieve greater efficiencies and to capitalize on synergistic opportunities between the businesses. We also believe our new operating model will help enable a new Endo culture focused on execution and accountability. Our second priority is to build our portfolio of capabilities for the future. In doing so, we identified assets in businesses that were no longer core to us and divested them or plan to in the near future, as they no longer align with our go-forward strategy. We've divested non-core assets such as BELBUCA and restructured Endo's pain franchise to become a highly focused specialty branded business. And today, we announced the divestiture of the South African Litha Healthcare Group. We are investing where we can win and divesting non-core assets. In this context, we have also identified Somar as non-core and we'll be conducting due diligence on divesting Somar in order to focus on regulated markets in developed countries. Both Litha and Somar are good businesses with talented teams, and we appreciate all the contributions they have made to our company. However, they are no longer a good strategic fit for Endo and they are better placed with companies that can provide the attention and resources they deserve. Lastly, our third priority is to drive margin expansion and de-lever. We will look to drive margin improvements through a culture focused on smart product selection, operational execution, and continuous improvements. In addition to driving margin improvement, de-levering is a priority and we do aspire to de-lever back into the three to four times range over time. We are not going to put a specific timeframe on we expect to achieve this goal due to the number of uncertainties in the near term that could impact the timing of achieving it. We are committed to taking a highly disciplined approach to capital allocation with the repayment of debt as a top priority after investing in our key growth driver. Through the actions we have already taken to date, we are achieving cost savings that will ultimately result in lower operating expenses, solid EBITDA generation and a significantly improved EBITDA margin percentage starting in 2017. Moving to slide 4. Today it is Endo's intent to be a highly focused generics and specialty branded pharmaceutical company, delivering high quality medicines to patients through excellence in development, manufacturing and commercialization. Endo will focus on its core assets

[Blaise Coleman:]

Thank you, Paul and good morning, everyone. First on slide 15, you'll see a snapshot of the fourth quarter GAAP financial results. Paul covered company and segment revenues earlier, so I will not review that here. On a GAAP basis, we had a loss per share of $14.96 in the quarter versus diluted earnings per share from continuing operations of $1.97 in the fourth quarter of 2015. GAAP net loss from continuing operations in the fourth quarter of 2016 was $3.3 billion compared to GAAP net income from continuing operations of $444 million during the same period in 2015. The $3.3 billion net loss resulted from $3.5 billion goodwill and intangible asset impairment charges recorded during fourth quarter 2016. Moving to slide 16, as Paul mentioned, during the fourth quarter, the company conducted its annual goodwill and in-process R&D impairment tests and tested several other finite lived intangible assets that had triggering events during the quarter. To test these assets for impairment, the company utilized estimated future cash flows developed as part of our fourth quarter company-wide forecasting process. The company's revised forecast reflects a change in outlook, primarily for its generics reporting unit reflecting the quickly evolving new realities of the U.S. generics external environment as characterized by increased buying power from the continued consolidation of its customer base, increased levels of competition due to the new low-cost competitors, and accelerated FDA ANDA approvals and a change in the value derived from estimated future pricing levels. All these factors, coupled with increases in the risk factor included in the discount rate used to calculate the discounted cash flows, have driven a material decrease in the estimated fair value of our generics reporting unit and certain intangible assets. This change in the estimated implied fair value led to the majority of the impairment charges recorded in fourth quarter. In addition to the impairment charges related to our generics reporting unit, we also had impairment charges related to our international pharmaceutical segment driven by a change in the expected future cash flows from those respective reporting units. Turning to slide 17, as Paul mentioned, on an adjusted basis, both revenue and adjusted diluted earnings per share are at the high end of our guidance range for the quarter and the year. To summarize the points Paul made earlier, revenue was strong due to the launches of ezetimibe and quetiapine extended release, the continued growth of our sterile injectables business, and double-digit growth for XIAFLEX. Adjusted net income of $396 million and adjusted diluted earnings per share from continuing operations of $1.77 increased versus fourth quarter 2015 due to higher revenues and lower operating expenses, especially when viewed as a percent of sales. Moving to cash and liquidity on slide 18, in fourth quarter 2016, cash flow from operations totaled approximately $81 million. We've also highlighted some of the material items that impacted our cash flow from operations on a quarterly and annual basis. On slide 19, you will see highlights of our full year 2017 guidance. We expect revenues to be approximately $3.45 billion to $3.6 billion, a low double-digit decline versus 2016 reflective of the pressures in our generics, branded, and international businesses Paul described earlier. Excluding the impact of divestitures and product discontinuations, our forecasted total enterprise revenue decline would be high single-digit. Reported diluted GAAP earnings per share from continuing operations are projected to be between $0.04 and $0.34 and we expect adjusted diluted earnings per share from continuing operations to be between $3.45 and $3.75. More importantly, we expect adjusted EBITDA from continuing operations to be between $1.5 billion to $1.58 billion representing a significant increase in adjusted EBITDA margin year-over-year reflective of the impact from our ongoing margin enhancement initiatives. The company's financial guidance is based on the following assumptions

[Paul V. Campanelli:]

Thank you, Blaise. Moving to slide 21, I want to reiterate and close with our three key priorities. Our 2017 financial guidance clearly reflects that Endo is entering a period of transition. From a company that grew through debt-fueled M&A to one that will primarily focus on organic growth in driving margin improvement through a new Endo culture focused on operational execution. It will take some time to successfully address the challenges that our company faces today, and it will take time to reposition Endo for long-term success. We are ready and we have already begun to meet these challenges and are very excited about our future. We have a management team with a track record of success. We have the people, products and pipeline in place that we believe will enable us in time to achieve success and create value for our shareholders. There are several reasons why I believe Endo represents an attractive opportunity for long-term investors. First, we reshaped the organization and have a new execution-focused culture built for sustainability in the future. And finally, we have and will maintain a highly disciplined approach to capital allocation with a commitment to delever over time that has the potential to create value for equity holders. I remain excited and enthusiastic about the opportunity to be leading the new Endo. I want to thank all of our employees for their hard work, dedication and commitment to the company. This has not been an easy period for them and I am proud of how they've fully embraced the new Endo culture and priorities. We continue to believe that this is a time of significant opportunity for Endo, our employees, the patients we serve and our shareholders. That concludes our prepared remarks. Let me now turn the call back over the Steve to manage our question-and-answer period. Steve?

[Stephen J. Mock:]

Thank you, Paul. We'd like now 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. Christy, may we have the first question?

[Operator:]

Thank you. Our first question is from the line of Louise Chen of Guggenheim. Your line is open.

[Louise Chen:]

Hi. Thanks for taking my questions here. So first question I had here was how we think about sales growth longer term. Just curious, given the fact that you've got some exclusive launches in 2017 and then also Vasostrict is a very big product for you. How do we think about growth in 2018 and beyond and any risk to those sales going forward? And then the second question I had was on Litha and Somar. Can you confirm whether or not those have been removed from the 2017 guidance? Thanks.

[Paul V. Campanelli:]

Okay. So Blaise will start with those.

[Blaise Coleman:]

Yeah. So Louise, on your second question, Somar is included in the guidance. Litha is included for essentially the first quarter and then we've removed it.

[Paul V. Campanelli:]

And Louise, in terms of how we look at the business on a go-forward basis, unfortunately at this time, we're not going to be able to guide beyond where we are in 2017. We have a series of uncertainties that we, in essence we've got to get through. And when you look at 2017, with the launches of ezetimibe and quetiapine, those are going to be tough comparators as we kind of look out into 2018. So with that, we're just going to have to ask for some patience here and we're just focused on 2017 at this point in time.

[Louise Chen:]

Okay. Thank you.

[Operator:]

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

[David A. Amsellem:]

Thanks. Wanted to get your thoughts, Paul, on the upcoming panel on OPANA ER, what you make of it, what ultimately do you think is the end game for the FDA and really your level of concern, or how should we be concerned about a potential that the product is removed from the market? Thanks.

[Paul V. Campanelli:]

Yeah. So David, I think right now, as you know, there's an Adcom on March 13 and 14. It is, in fact, a joint meeting to discuss the risk and benefit of all oxymorphone products, so it's not just OPANA ER. It includes any generic forms of oxymorphone as well. As you can imagine, Endo's always going to be focused on patient safety. That's a top priority, and we're committed really to provide patients – to have a commitment to provide patients with safe and efficacious products for their intended use. So right now, the Adcom is focused on risk-benefit from abuse, so it's a little bit difficult for us to opine in terms of what the end game is with the FDA. I think at this point in time, what we can say is that our studies to date support the safety and efficacy for the intended use of OPANA. We'll know on March 13 and 14 what the potential outcome is. So really, at this point in time, we're prepared to discuss all aspects of our trials but we're in a wait-and-see game until March 13 and 14.

[David A. Amsellem:]

Okay. Thanks.

[Operator:]

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

[Elliot Wilbur:]

Thanks. Good morning. Just two questions on the generic business overall. First, Paul, in your deck, I think it's slide eight, the waterfall chart, you talk about 2017 price erosion sort of a high single-digit impact. And basically what I'm looking for is commentary on the actual rate of price erosion exiting 2016 and then what you have embedded in 2017 in terms of just the pure price erosion metric. Obviously we talked before, base business down 23% year-over-year and then just sort of your earlier commentary that it will be down 30%. Obviously there's a fairly big volume impact included in that as well. Just trying to get a sense of what the actual price erosion on the portfolio may be. And then secondly, with respect to new product launch expectations, I think you talked about approximately 20 launches. How many of those do you actually have a relatively high degree of visibility on in terms of either specific date-certain patent expiration or a settlement? Obviously, the FDA hasn't been doing...

[Paul V. Campanelli:]

Okay.

[Elliot Wilbur:]

Favors for any companies in terms of specialties, generics. Just want to get a sense of the degree of confidence we can have around that level of launches. Thanks.

[Paul V. Campanelli:]

So Elliot, what I'll do is I'll give you some visibility really on the new product launches and Blaise will give you a little bit more color on the base erosion, which has about four components of the composition here. So moving back to like new product launches, as we say – I'm going to go through this pretty slowly so there's no confusion. When we look at new product launches for 2017, we say we have about 20 products. I would tell that we have a fairly high degree of confidence that those are all products that we will be able to deliver on. Now there's always some degrees of uncertainty, but in this case, when we talk about the 20 products, I have pretty good certitude that we're going to execute and we've already launched a series of products up to this point. When we look at – maybe I'll put a little color on the value. I think that's probably important. When we look at these 20 new products, the value that we should be looking at is about $100 million dollars of true, pure new product launches from a revenue standpoint. So we want to get that out there. But I think it's also important to talk maybe just a little bit of the carryover for our ZETIA and quetiapine because they're so big contributors to what we're doing. So when you look at those two products, there's going to be a carryover value of about $360 million of those two products. So you've got $100 million of new product launches, true, pure new product launches, about $360 million of carryover products that are ZETIA and quetiapine, and then you should look at about another $100 million dollars of carryover 2016 products into 2017 that are excluding ZETIA and quetiapine. So that should give you full color on how we're looking at 2017. Now I'll turn it over to Blaise to give you some color on base erosion.

[Blaise Coleman:]

Yeah. Elliot, so just to pick up on your questions, when we think about 2016, in terms of from a price volume standpoint, overall we had about 13% price erosion in that 30%. There's two components of that. There's a normal course sort of price erosion and there's price erosion due to new competitor events. And so for a normal course, it was sort of in the mid-single digits, and then the delta was due to competitor events. When we show it now for 2017, on the slide there you see that 9% price erosion. That's very much our normal course price erosion and included in that is obviously our expectations around some additional pressure from the consortiums through the course of the year. There's another element that's embedded in the other blocks in terms of the competitor events that also has a price element to it. And again that – so from a total price erosion standpoint year-over-year, when you take the normal course and then the impact from competitor events, we would also have that in sort of that low double-digit mid-teen range.

[Elliot Wilbur:]

Okay.

[Operator:]

Thank you. Our next question is from Marc Goodman of UBS. Your line ...

[Marc Goodman:]

So Paul once we get rid of the international business, okay, we understand that's happening. And then should we assume that you're done taking a look at the branded products and that what we see today is what we're going to keep? That's really the first question. Second is, can you just give us a flavor for generic gross margins in the quarter? And then third, that was a great explanation for the previous answer. Is there any way you could tease out just how much the consortiums is adding to the pricing pressure? Is it an extra 2% in the year, 3%? Is there any way you could do that, Paul, just for us to understand? Thanks.

[Blaise Coleman:]

High level, Marc, we'd say the consortium pricing pressure's probably adding about 3% to 4% about. About, yeah, that'd be generally. And then Marc, maybe I'll just handle your gross margin question. So our generics gross margin for the segment in fourth quarter 2016 was around 55%.

[Marc Goodman:]

Yeah.

[Paul V. Campanelli:]

And then, Marc, in terms of the big question really in terms of how we're looking at our businesses, I think we've proven and we've shown that we've taken a lot of action here over the last four or five months here with decisions that we've made on the portfolio on facilities and BELBUCA amongst many other things, and really doing this with a new leadership team that's been in place for really probably three or four months. As we take a step back and look at our total businesses, your question was specifically on the branded side. I think how we're looking at it is, we are considering optionality across really the entire business. Ultimately, we'll need to do what's right for Endo. We are prepared for success both on the generic side and the branded side. So we are putting resources into R&D both from pure generic play, and obviously we're preparing for success in XIAFLEX. But we also have to keep our optionality open. If we can place Endo in a better position down the line, we would just have to always consider that and I think you would expect that from us as normal course. So that's pretty much where we are. We want to keep our options open.

[Marc Goodman:]

Thanks.

[Paul V. Campanelli:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from Randall Stanicky of RBC Capital Markets. Your line is open.

[Randall S. Stanicky:]

Great. Thanks. Paul, I just have a couple of quick follow-ups. If the 4Q generic gross margin was 55%, I think you'd pointed to high 50% for 2017. What's driving that and how does some of this base business erosion factor into that, I guess that increase in margin outlook if that is correct? And then secondly, do we have timing around McKesson, Walmart, the bid cycle there? Can you just provide some comments on expectations? And then I have one really quick follow-up after that.

[Paul V. Campanelli:]

Okay. So I would say the gross margins that's driving up into the mid-50s. Now Blaise, I would point to the 505(b)(2)s. I think part of that, as you look at the sterile injectables unit, the margins there are very healthy. We've had success with the potassium liquids and powder product. Adrenaline is another product that we've had great success with. So those are, for the most part, the drivers of positive gross margin.

[Blaise Coleman:]

The other thing, I would add, Paul is, Randall, as we mentioned in the slides, we'll see about $75 million of savings related to the generic restructuring. That's an incremental $50 million of savings from what we had in 2016. So that's also contributing heavily to the gross margin favorability. So both the product mix that Paul talked about as well as the cost savings initiatives that we have been driving.

[Paul V. Campanelli:]

Yeah. And then in terms of the Claris One impact, right now, I would tell you it's a little hard to totally pinpoint the implementation of Claris One. But I would probably – my instinct is telling me somewhere around Q2, maybe Q3.

[Randall S. Stanicky:]

And that's built into the 3% to 4% impact that you talked about from consortium pressure?

[Paul V. Campanelli:]

Yes. When we talk about base erosion similar in 2017 as 2016, we are including the impact of Claris One.

[Randall S. Stanicky:]

Okay, great. And then just one clarification. So we talked about on the mesh side, 8,000 cases last year, earlier in year. Can you just update us? What is that outstanding number now in terms of total outstanding mesh cases, and what's the trend been in terms of settlement, just so that we can try to get some better visibility or a handle around where and what really when that's going to resolve?

[Paul V. Campanelli:]

Okay. So, so I'm going to pass it over to Blaise, but you're referring to the 8,000 claims that we've increased to 9,700?

[Randall S. Stanicky:]

Yeah, maybe Blaise, we can talk a little bit about it.

[Blaise Coleman:]

Yeah, so Randall, the 9,700 of the non-NSA claims that we've been filed, asserted or that we believe are likely to be asserted that we haven't accrued for, because we can't assess probability of loss at this time. And there's a number of reasons why that can increase. Some of those, and many of those are outside of our control. It has to do with a number of factors including the receipt of new information, and some of that comes in as the end of the tolling agreements are lifted, which really causes the statute of limitations to begin running and requires claimants to file in order to avoid dismissal. There's also the additional advertising by plaintiff attorneys as well as other factors. So all of those things are contributing to us receiving new information that's really leading to the increase to the 9,700.

[Randall S. Stanicky:]

Okay, I mean, you don't expect that to – is that 9,700 kind of where you expect that to max out at or are we still seeing claims coming in?

[Blaise Coleman:]

Yeah, I mean, Randall, at this time, we don't have any way to predict that.

[Randall S. Stanicky:]

Okay, okay. Thanks a lot guys. It's helpful.

[Paul V. Campanelli:]

Thank you, Randall. Okay.

[Operator:]

Thank you. Our next question is from Greg Fraser of Deutsche Bank. Your line is open.

[Gregory D. Fraser:]

Morning, guys. It's Greg Fraser on for Gregg Gilbert. Thanks for the additional color on how to think about the generics business in 2017. That was helpful. I was wondering if you could comment on how much growth you would expect for the injectables business this year, or is that sort of embedded in the other comments that you made?

[Paul V. Campanelli:]

It's embedded. Let's see if we can – just bear with us for a second here. We can give you just a little color on growth.

[Blaise Coleman:]

Yeah, in terms of growth, we would expect that to be sort of in the high single-digits to low double-digits growth in 2017 for the overall sterile injectables.

[Gregory D. Fraser:]

Got it. And then a question on cash flow and the $975 million of cash distributions expected to settle mesh claims in 2017. Will there be a tax refund related to those payments? It wasn't clear.

[Blaise Coleman:]

Yeah. So, Greg, the way you should think about modeling cash taxes is not to do it at any specific line item, but do it at an enterprise level. So the guidance we gave is that we anticipate that our cash tax rate will be in the low single-digits as a percentage of pre-tax adjusted net income and that's how we would recommend that you model cash taxes.

[Gregory D. Fraser:]

Will there be a specific refund related to the...

[Blaise Coleman:]

Not specific to that, no.

[Gregory D. Fraser:]

Okay. And then just last quick one. How do we think about R&D spend for the cellulite study that you're going to be starting in the second half? Thank you.

[Paul V. Campanelli:]

Well, we are preparing for success. The actual number is about 30-ish, about $30 million, for the clinical trial portion.

[Blaise Coleman:]

In 2017.

[Paul V. Campanelli:]

In 2017, for the clinical trial portion of cellulite. Okay? Thank you.

[Operator:]

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

[Dana C. Flanders:]

Hi. Thanks. This is Dana Flanders on for Chris. Just my first question, can you just talk a little bit more about your outlook for your potassium chloride products? And I know you mentioned the incremental opportunity to gain share on the powder. Maybe you can help frame that. And then what are your assumptions around competition in guidance for 2017 on both the liquid and powder? And then I have a quick follow-up.

[Paul V. Campanelli:]

Well, regarding both those products, there's no intellectual property holding anybody back from filing it or launching into those products. So I think you just have to assume that generic competition is able to come back into both the liquid and the powder. That said, anyone filing an ANDA would have to go through the standard regulatory process and you'd have to assume probably about a 24-month review, knowing that these NDAs have been approved for more than a year. So I just caution you on the longevity. So these products have been approved, I believe since 2014, maybe even 2015. Anybody that would file an ANDA, I would not have visibility to that, because they would be filing paragraph probably two. There's no patents associated with these 505(b)(2)s. But at this point in time, we have 100% of the liquid market and we have much greater than 50% share in the powder market.

[Dana C. Flanders:]

Oh, great. Okay, great. And my quick follow-up, just can you talk about the interest expense for 2017? I know that came in I think a little bit higher that what we were expecting. And so just what's the average blended interest rate for the company? And just, I guess, help frame your exposure to rising interest rates. Thank you.

[Blaise Coleman:]

Yeah. So that's right. We do – just to remind you, about 45% of our debt is variable base debt and we have factored into our guidance increased, in a rate increased environment, have factored that into our thinking. And that's what's really driving the impact you're seeing year-over-year from a interest expense standpoint.

[Paul V. Campanelli:]

Okay. Thank you. Next question.

[Operator:]

Thank you. Our next question is from David Risinger of Morgan Stanley. Your line is open.

[Thomas Chiu:]

Hi, thanks. This is Thomas Chiu on behalf of Dave. We just had one question. Regarding XIAFLEX for cellulite, could you please disclose how you plan to address the pricing given the high price for medical conditions and (51

[Paul V. Campanelli:]

Yeah. So, Thomas, thank you. At this point in time, we do have a strategy but we're not going to – at this point in time, it just we're not going to elaborate. We acknowledge the challenge and we do have a plan to address it. When it's finalized, we'll be pleased to communicate it. So we're just going to ask for some patience in this regard. Thank you. Next question.

[Operator:]

Thank you. Our next question is from Gary Nachman of BMO. Your line is open.

[Unknown Speaker:]

Good morning. This is Nicole (52

[Paul V. Campanelli:]

Sure. So in terms of the Phase 2 program, the trial had about 375 patients enrolled in it and just from a very – to try to address the question from a very high level, it utilized a primary endpoint that had what was called a two-point improvement in severity from baseline. So it was a internally developed metric with external consultants, that if you as a patient or clinician had seen more than a two-point improvement from baseline, that that would ultimately provide clarity in terms of the direction of the results. This study is really kind of referred to as a photonumeric cellulite severity scale, and the results were discussed with the FDA probably about two, three weeks ago in our end of Phase 2b discussions with the FDA. That meeting went reasonably well. We're pretty excited, and we are preparing for success as we move into Phase 3. We try not to get too deep into the results because, ultimately, we want to publish the results of the trial. So stay tuned, but we, again, we're planning for success. We're very excited about the outcome of Phase 2b, and we should be preparing for Phase 3 in the Q4 timeframe.

[Unknown Speaker:]

Great. Thank you.

[Paul V. Campanelli:]

Thank you.

[Operator:]

Thank you. Our next question is from Andrew Finkelstein of Susquehanna. Your line is open.

[Paul V. Campanelli:]

Andrew?

[Operator:]

Please check your mute button.

[Stephen J. Mock:]

Christy, maybe we want to go on to the next question.

[Operator:]

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

[Andrew Finkelstein:]

Hi. Hello?

[Operator:]

Oh.

[Liav Abraham:]

Hi.

[Paul V. Campanelli:]

Hi, Liav.

[Liav Abraham:]

Hi. Thanks. Good morning. Firstly, could you please just outline the exact contribution from generic SEROQUEL and ZETIA in 2016 in the fourth quarter? And then secondly, just a question on your path to delevering which is, I understand to be a stated goal. I understand that you don't want to provide specific commentary or timelines on how you get there. But perhaps you can help us think about the pushes and pulls as it relates to cash flows in at least post 2017 as you aim to get to that three to four times range.

[Paul V. Campanelli:]

So the exact was what, $208 – yeah. So the exact combined for ezetimibe and quetiapine for Q4 was $293 million, Liav.

[Liav Abraham:]

Thanks.

[Paul V. Campanelli:]

Okay. And in terms of the push and pulls, I think at this point in time, we're not – we're just not in the position to give specifics. As I mentioned earlier, we've made tremendous progress in a short period of time, but there still is a degree of uncertainties that we need to get our hands wrapped around. So we're just going to ask from some patience. Clearly it's a primary focus and you can see the moves that we're making to put ourselves in a better position for efficiencies and growing, really at the end of the day, growing EBITDA margins. Just give us little bit more time and when we're ready, we'll come back and communicate where we stand on our strategy for delivering in 2018.

[Liav Abraham:]

Thank you.

[Paul V. Campanelli:]

Thank you.

[Operator:]

Thank you. And now we'll take Andrew Finkelstein's question of Susquehanna. Your line is open.

[Andrew Finkelstein:]

Thanks very much for taking the question. Apologies for the delay. I was just hoping you could talk a little bit more – the slides mention a stocking impact in generics in 4Q. I noticed the generics base was up quarter-on-quarter. So if you could talk a little bit about those dynamics. Second, on potassium, you note the lack of exclusivity but do you have any views on the citizen petition that one of your competitors submitted recently, regarding elemental impurities? And then, just for the generics business more broadly, are there any pipeline products in particular, that should be a focus for people as opportunities either in the second half of this year or as we go into next year? Thanks.

[Paul V. Campanelli:]

Sure. So there's three questions there. I'm going to let Blaise answer your first one.

[Blaise Coleman:]

Andrew, just in terms of stocking in Q4 in generic, so if we look at total generics, and we're going to exclude quetiapine and ezetimibe because they're just – we had the major launches. Excluding those two products, the overall stocking in our generics business was around $25 million, and then particularly in the base business in fourth quarter, we saw about $12 million of stocking.

[Paul V. Campanelli:]

Okay. And then, Andrew, your question regarding the citizens' petition, we believe that ultimately that citizens' petition's not going to have any impact on our ability to sell in terms of opening up competition. And as I mentioned earlier, there isn't anything stopping anyone from filing an ANDA. So when that occurs and the FDA approves somebody, we'll defend our share, as you would expect, as Par-based product. Regarding the pipeline focus, I think really if you go back in some of the questions that we – sorry some of the commentary around ephedrine and adrenaline, the fact that the FDA's taken action to take the unapproved sources off the market in several months, that's probably where I would focus my attention to in terms of drivers for 2017, ephedrine and adrenaline.

[Andrew Finkelstein:]

Thanks very much.

[Paul V. Campanelli:]

Okay.

[Stephen J. Mock:]

Okay.

[Operator:]

Thank you.

[Stephen J. Mock:]

Go ahead. Next question, please.

[Operator:]

Our next question is from Annabel Samimy of Stifel. Your line is open.

[Esther Hong:]

Hi. This is Esther Hong on for Annabel Samimy. Just a quick question on Vasostrict. Can you provide any updates on any potential competition for that product? Thank you.

[Paul V. Campanelli:]

Sure. Thank you. At this point in time, as you know, we have intellectual property. We have an Orange Book patent and to the best of our knowledge, we believe at this point in time that we have not been noticed from any Paragraph IV filers. So I think it's probably maybe the best way to communicate that. At this point in time, we have not been noticed of any Paragraph IV applicants.

[Stephen J. Mock:]

Okay. Christy, we'll take one more question please.

[Operator:]

Our last question is from the line of Ken Cacciatore of Cowen & Company. Your line is open.

[Ken Cacciatore:]

Hey, thanks guys. Just real quick question. Just looking forward to the cellulite Phase 3, just kind of counting out how long would it take. Sounds like it could be on the market around 2020. So just wondering, can you review for us the XIAFLEX intellectual property, when we should expect you have durability for this product too? Thank you.

[Paul V. Campanelli:]

So Ken, your assumptions are in the ballpark in terms of timing, assuming success so I probably wouldn't go any deeper than that. In terms of the intellectual property surrounding XIAFLEX, there are a number of – there's a number of patents that have been granted. I would say most notably, there's a 560 patent that expires in 2026, but on top of that, as you would expect, our team is working towards additional patents for end market as well as potential future indication, so work in progress. And then, just keep in mind that it is a BLA and with that comes a series of de facto challenges. This is not something that is easily developed, so we're pretty excited about potential indications and – okay. Okay. All right.

[Stephen J. Mock:]

All right. That concludes the Q&A session.

[Paul V. Campanelli:]

Okay. So with that, thank you, Steve. As I said, this is a important time for Endo. We appreciate your continued interest and support of the company, and we look forward to providing you with updates as we move forward. Thank you all for joining us in the call today. Thank you, and good bye.

[Operator:]

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