Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (04-29-08 07:48 AM)

The Daily Magic Formula Stock for 04/29/2008 is Endo Pharmaceuticals Holdings Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

We are a specialty pharmaceutical company with market leadership in pain management. We are engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain.

We have a portfolio of branded products that includes established brand names such as Lidoderm ® , Opana ® ER and Opana ® , Percocet ® and Frova ® . Branded products comprised approximately 92% of our net sales in 2007, with 65% of our net sales coming from Lidoderm ® . Our non-branded generic portfolio, which accounted for 8% of net sales in 2007, currently consists of products primarily focused in pain management. We focus selectively on generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing.

We have established research and development expertise in analgesics and devote significant resources to this effort so that we can maintain and develop our product pipeline. Our branded product pipeline includes three products in Phase III clinical trials, three products in Phase II clinical trials and one product in Phase I trials.

We enhance our financial flexibility by outsourcing certain of our functions, including manufacturing and distribution. Currently, our primary suppliers of contract manufacturing services are Novartis Consumer Health, Inc. and Teikoku Seiyaku Co., Ltd.

Through a dedicated sales force of approximately 700 sales representatives in the United States, we market our branded pharmaceutical products to high-prescribing physicians in pain management, neurology, surgery, anesthesiology, oncology and primary care. Our sales force also targets retail pharmacies and other healthcare professionals throughout the United States.

On a continuous basis, we evaluate and, where appropriate, pursue acquisition opportunities. In particular, we look to continue to enhance our product line by acquiring or licensing rights to additional products and compounds and therefore regularly evaluate selective acquisition and license opportunities. Such acquisitions or licenses may be carried out through the purchase of assets, joint ventures and licenses or by acquiring other companies.

Our wholly-owned subsidiary, Endo Pharmaceuticals Inc. (EPI), commenced operations in 1997 by acquiring certain pharmaceutical products, related rights and assets of The DuPont Merck Pharmaceutical Company, which subsequently became DuPont Pharmaceuticals Company and was thereafter purchased by the Bristol-Myers Squibb Pharma Company in 2001. Endo Pharmaceuticals Inc. was formed by some members of the then-existing management of DuPont Merck and an affiliate of Kelso & Company who were also parties to the purchase agreement, under which we acquired these initial assets.

We were incorporated in Delaware as a holding company on November 18, 1997 and have our principal executive offices at 100 Endo Boulevard, Chadds Ford, Pennsylvania 19317 (telephone number: (610) 558-9800).

Our Strategy

Our business strategy is to become the leading pain company and to develop a diversified portfolio of innovative and clinically differentiated products through a mix of new chemical entities (NCEs) and 505(b)(2) products (See “Governmental Regulation—NDA Process” below for a discussion of Section 505(b)(2) of the Federal Food and Drug and Cosmetic Act (Act)). We are continuously seeking opportunities that deepen our penetration in the pain area. In addition, we review opportunities to enter into one or two additional specialty-focused therapeutic categories such as Central Nervous System (CNS) disorders, rheumatology, specialty psychiatry, gastroenterology, supportive care and therapeutic oncology that have the potential to provide diversification and growth, and return on investment while enhancing shareholder value. Our business development activities include both product licensing opportunities and company acquisitions to diversify our revenue base in the near term and strengthen our pipeline for the future. We will continue to focus on driving growth of our existing business by maximizing the potential of our key on-market products including Lidoderm ® for post-herpetic neuralgia, the Opana ® franchise and Frova ® for the acute treatment of migraine headaches in adults and on advancing our current development pipeline. We also plan to continue to use our generic formulation expertise to develop high barrier to entry generic products.

The elements of our strategy include:

Leveraging our pain management expertise by developing proprietary products and generic products with significant barriers to market entry. To capitalize on our expertise in pain management and deepen our penetration of the pain market, we are developing new products that we believe will substantially improve the treatment of acute, chronic and neuropathic pain conditions. We have several products in late-stage clinical trials, including (1) EN3267 (Rapinyl™), a sub-lingual, fast-dissolving tablet of fentanyl intended for the treatment of breakthrough cancer pain. The benefits of Rapinyl™ are believed to include both a fast onset of action and patient convenience; (2) EN3269, our once-daily ketoprofen-containing topical patch. Ketoprofen is a non-steroidal anti-inflammatory drug (NSAID) generally used for the treatment of inflammation and pain and currently available in the U.S. only in oral form; and (3) EN3285, Oral Rinse, a topical oral rinse in development for the prevention or delay of severe oral mucositis (OM), painful mouth sores that often occur in cancer
patients undergoing radiation and chemotherapeutic treatment. Consistent with our announced strategy, of considering earlier-stage opportunities than we have historically considered, we recently licensed Alexza Pharmaceuticals’ AZ-0003, their Staccato ® system inhalation technology to deliver fentanyl for the treatment of breakthrough pain (Staccato ® fentanyl), now named EN3294. EN3294 is now in Phase I clinical trials.

Acquiring and in-licensing companies, products, compounds and technologies. We look to continue to enhance our product line and develop a balanced portfolio of differentiated products through selective product acquisitions and in-licensing, or acquiring licenses to products, compounds and technologies from third parties or through company acquisitions. We enter into strategic alliances and collaborative arrangements with third parties, which give us rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are owned by such third parties. These alliances and arrangements can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-promotion arrangements, research collaborations and joint ventures. Such alliances and arrangements enable us to share the risk of incurring research and development expenses that do not lead to revenue-generating products; however, because profits from alliance products are shared with our alliance partners, the gross margins on alliance products are generally lower, sometimes substantially so, than the gross margins that could be achieved had we not opted for a development partner. While there can be no assurance that new alliances will be formed, we actively pursue such arrangements and view alliances as an important complement to our own development activities.

Each of our strategic alliances and arrangements with third parties who own the rights to manufacture, market and/or sell pharmaceutical products contain customary early termination provisions typically found in agreements of this kind and are generally based on the other party’s material breach or bankruptcy (voluntary or involuntary) and product safety concerns. The loss of rights to one or more products that are marketed and sold by us pursuant to strategic alliance arrangements with third parties could have a material impact on our results of operations, financial condition and cash flows. As is customary in the pharmaceutical industry, the terms of our strategic alliances and arrangements generally are co-extensive with the exclusivity period.

The most significant current alliances for our currently marketed products are those with Hind Healthcare for Lidoderm ® , Penwest Pharmaceuticals Co. for Opana ® ER and Vernalis Development Limited for Frova ® . Our most significant alliances, arrangements and recent acquisitions for products under development are with Orexo AB for Rapinyl™ (EN3267); ProEthic Pharmaceuticals, Inc. for the topical ketoprofen patch (EN3269); DURECT Corporation for the Sufentanil Transdermal Patch (EN3270); the October 2006 acquisition of Boulder, Colorado-based RxKinetix and their lead product now named EN3285; and Alexza Pharmaceuticals Inc. for Staccato ® fentanyl (EN3294). Each of these significant alliances are discussed in more detail below under the heading “Acquisitions, License and Collaboration Agreements ”.

Capitalizing on our established brand names and brand awareness through focused marketing and promotional efforts. We believe that our strong corporate and product reputation combined with focused marketing and promotional efforts leads to more rapid adoption of our new products by physicians and institutions.




•


Lidoderm ® , the first product approved by the U.S. Food and Drug Administration (FDA) for the treatment of the pain associated with post-herpetic neuralgia, a condition thought to result after nerve fibers are damaged during a case of Herpes Zoster (commonly known as shingles). Lidoderm ® continues to increase market penetration due to our ongoing promotional and educational efforts. Continued growth will be supported by the product’s proven clinical effectiveness combined with incremental promotional support generated by the expansion of Endo’s sales force in 2007.



•


During the second half of 2006, we launched Opana ® and Opana ® ER and during the fourth quarter of 2006, we implemented a full range of promotional activities to generate broader physician awareness and continued steady adoption of these products. During 2007, we continued to promote and market these products through a host of activities, including expanding our managed markets organization to enhance product access within the various managed care plans, introducing an instant savings card program, completing a Specialty II sales force expansion, initiating a new promotional campaign and conducting key opinion leader speaker programs. We are committed to providing healthcare professionals and patients with safe and effective opioid analgesic medications and, accordingly, we support programs that are intended to facilitate the appropriate and responsible use of opioid analgesics. Through extensive experience with opioid analgesics and communicating with the FDA and industry experts, we have developed a comprehensive risk minimization action plan for Opana ® ER and Opana ® . Evolving from this risk minimization action plan is a new initiative to further help reduce the inherent risk of misuse, abuse and diversion of opioid analgesics: The Partnership for Responsible Opioid Management through Information, Support, and Education (PROMISE™). The PROMISE™ initiative contains essential information and guidance to healthcare professionals so that they can prescribe opioids to patients responsibly and appropriately. PROMISE™ includes educational support and practical patient management tools. For patients, the program raises the level of knowledge of those suffering from moderate-to-severe pain and empowers them to manage their condition with the help of their healthcare professional.




•


During 2004, we launched Frova ® for the treatment of migraine headaches in adults. We believe Frova ® has differentiating features from other migraine products, including the longest half-life in the triptan class and a low reported migraine recurrence rate in its clinical program. We believe these distinct characteristics have yet to be fully exploited in the North American market and that we will be able to capitalize on Frova ® ’s clinical benefits and commercial potential by targeting the specialty physician audience and effectively leveraging the relationships and reputation that we have built with the neurology and pain specialist community over the years.


•

We believe this interaction with the thought leaders and our track record of developing and launching new products has enabled us to pursue, through in-licensing and acquisitions, novel products for the treatment of pain and complementary therapeutic areas.

Our Competitive Strengths

We believe that we have established a position as a market leader among specialty pharmaceutical companies by capitalizing on our following core strengths:

Established portfolio of branded products. We have assembled a portfolio of branded pharmaceutical products to treat and manage pain. These products include:




•


Lidoderm ® was launched in September 1999. A topical patch product containing lidocaine, it was the first FDA-approved product for the relief of the pain associated with post-herpetic neuralgia. There are approximately 200,000 patients per year who suffer from this condition in the United States. The FDA had granted Lidoderm ® orphan drug status, generally meaning that no other lidocaine-containing topical patch product could have been approved for this indication until the orphan drug status expiration date, which occurred on March 19, 2006. While the orphan drug exclusivity period for Lidoderm ® has expired, Lidoderm ® is currently protected by Orange Book-listed patents for, among other things, a method of treating post-herpetic neuralgia and the composition of the lidocaine-containing patch. The last of these patents is set to expire in 2015. In addition, we are currently exploring potential additional indications of Lidoderm ® through Phase II safety and efficacy studies.



•


Percocet ® , our oxycodone/acetaminophen combination product, and Percodan ® , our oxycodone/aspirin combination product, which have been marketed since 1976 and 1950, respectively, are what we consider to be “gold standards” of pain management based on their long history of demonstrated product safety and effectiveness. We believe our close relationships with physicians who are considered to be pain management “thought leaders” in pain centers, hospitals, and other pain management institutions enable us to maintain our market penetration.




•


Opana ® ER and Opana ® were launched during the second half of 2006 and have shown steady prescription growth trends since their launch. Opana ® ER is indicated for the relief of moderate-to-severe pain in patients requiring continuous, around-the-clock opioid treatment for an extended period of time. This is the first time oxymorphone is available in an oral, extended-release formulation and is available in 5mg, 10mg, 20mg and 40mg tablets. Opana ® (the immediate-release version) is indicated for the relief of moderate-to-severe acute pain where the use of an opioid is appropriate and is available in 5mg and 10mg tablets.




•


Frova ® , for the treatment of migraine headaches in adults, was added to our portfolio of branded products during 2004. We believe Frova ® has differentiating features from other migraine products, including the longest half-life in the triptan class and a low reported migraine recurrence rate in its clinical program. We believe these distinct characteristics have yet to be fully exploited in the North American market and that we will be able to capitalize on Frova ® ’s clinical benefits and commercial potential by targeting the specialty physician audience and effectively leveraging the relationships and reputation that we have built with the neurology and pain specialist community over the years.

Substantial pipeline focused on pain management with a balanced focus on complementary therapeutic areas. As a result of our focused research and development efforts, we believe we have a promising development pipeline and are well-positioned to capitalize on our core expertise with analgesics. A summary description of certain products in development is below. For a more detailed description of our development pipeline, including those noted below, see the “Product Overview—Products in Development” discussion included in this section.


•

EN3267 Rapinyl™. Currently in Phase III clinical trial development, Rapinyl™ is a sub-lingual, fast-dissolving tablet of fentanyl intended for the treatment of breakthrough cancer pain.


•

EN3269 Topical Ketoprofen Patch. Currently in Phase III clinical trials in the U.S., EN3269 is being developed for the localized treatment of acute pain associated with soft-tissue injuries.


•

EN3285 Oral Rinse. In December 2007, we initiated the first of two Phase III clinical studies for EN3285, a topical oral rinse for the prevention or delay of severe oral mucositis (OM), painful mouth sores that often occur in cancer patients undergoing radiation and chemotherapeutic treatment.


•

EN3270 Transdermal Sufentanil Patch. Currently in Phase IIa clinical trials, EN3270 is intended to provide relief of moderate-to-severe chronic pain for up to seven days.



•


EN3294 Staccato ® fentanyl. Currently in Phase I clinical trial development, EN3294 is a hand-held delivery system that uses Alexza’s proprietary Staccato ® system inhalation technology to deliver fentanyl for the treatment of breakthrough pain.




•


EN3266 Frova ® MM. In September 2007, we received a non-approvable letter from FDA identifying deficiencies and asking for additional information pertaining to our supplemental New Drug Application (sNDA) for Frova ® (frovatriptan succinate) 2.5 mg tablets for the short-term (six days per menstrual cycle) prevention of menstrual migraine (MM). We, along with our development partner Vernalis Plc, are continuing to evaluate the points raised in the FDA notification, and are currently determining the appropriate course of action.

In addition, two other development products EN3260 Lidoderm ® and LidoPAIN ® BP are in Phase II clinical trials. We also have other undisclosed products in early stages of development.

Research and development expertise. Our research and development effort is focused on the development of a balanced, diversified portfolio of innovative and clinically differentiated products. We are continuously seeking opportunities that deepen our penetration in the pain area. In addition, we review opportunities to enter into one or two additional specialty-focused therapeutic categories such as Central Nervous System (CNS) disorders, rheumatology, specialty psychiatry, gastroenterology, supportive care and therapeutic oncology that have the potential to provide diversification and growth, and return on investment while enhancing shareholder value. We will continue to capitalize on our core expertise with analgesics and expand our abilities to capture both earlier-stage opportunities and pursue other therapeutic areas. We continue to invest in research ad development because we believe it is critical to our long-term competitiveness. At December 31, 2007, our research and development and regulatory affairs staff consisted of 121 employees, based in Westbury, New York and at our corporate headquarters in Chadds Ford, Pennsylvania. Our research and development expenses, including milestone payments were $138.3 million in 2007, $86.6 million in 2006 and $91.8 million in 2005.

We have assembled an experienced and multi-disciplined research and development team of scientists and technicians with a proven expertise working with analgesics and complex formulations. We believe this expertise allows for timely FDA approval of our products. To supplement our internal efforts, we engage the services of various independent research organizations, physicians and hospitals to conduct and coordinate our pre-clinical and clinical studies to establish the safety and effectiveness of new products. In addition, many of the research and development activities of products to which we have licensed the marketing rights are performed by our partners.

Drug development is time-consuming, expensive and risky. In the development of human health products, industry practice and government regulations in the U.S. provide for the determination of effectiveness and safety of new molecular entities through preclinical tests and controlled clinical evaluation. Before a new drug may be marketed in the U.S., recorded data on preclinical and clinical experience are included in the New Drug Application (NDA) to the FDA for the required approval. On average, only about one in ten thousand chemical compounds discovered by pharmaceutical industry researchers prove to be both medically effective and safe enough to become an approved medicine. The process from discovery to regulatory approval typically takes ten years or longer. Drug candidates can fail at any stage of the process, and even late-stage product candidates sometimes fail to receive regulatory approval. We believe our investment in research and development, both internally and in collaboration with others, has been productive as demonstrated by our ability to commercialize our research and development efforts by launching a number of new products and product line extensions since August 1997.

Targeted national sales and marketing infrastructure. We market our products directly to physicians through an internal sales force of approximately 700 specialty and office-based representatives. Through our sales force, we market our branded pharmaceutical products to just over 70,000 physicians, which include both specialists and primary care physicians. We distribute our products principally through independent wholesale distributors, but we also sell directly to retailers, hospitals, clinics, government agencies and pharmacies. Our marketing policy is designed to assure that products and relevant medical information are immediately available to physicians, pharmacies, hospitals, public and private payers, and appropriate health care professionals throughout the country. We work to gain access to health authority, Pharmacy Benefit Managers (PBMs) and Managed Care Organizations (MCOs) formularies (lists of recommended or approved medicines and other products), including Medicare Part D plans and reimbursement lists by demonstrating the qualities and treatment benefits of our products. To increase broad formulary access for our growing product portfolio, we expanded our managed markets staff in 2007 to 42 employees from 13 employees in the prior year.

Selective focus on generic products. Our generic product portfolio includes products focused on pain management. We develop generic products that involve significant barriers to entry such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. We believe products with these characteristics will face a lesser degree of competition and therefore provide longer product life cycles and higher profitability than commodity generic products. We have executed our generic product development strategy successfully to date with products such as morphine sulfate extended-release tablets, which we introduced in November 1998 as a bioequivalent version of MS Contin, a product of The Purdue Frederick Company.

Experienced and dedicated management team. Our senior management team has a proven track record of building our business through internal growth as well as through licensing and acquisitions. Members of our senior management were responsible for the licensing of Lidoderm ® , Frova ® and Rapinyl™, as well as three other products, a topical ketoprofen patch being studied for soft tissue injuries, a 7-day transdermal sufentanil patch being studied for moderate-to-severe chronic pain, and most recently, a hand-held delivery system that uses Alexza’s proprietary Staccato ® system inhalation technology to deliver fentanyl for the treatment of breakthrough pain. Management has received FDA approval on more than seventeen new products and product line extensions since 1997, and as a result of several successful product launches, has grown our net sales tenfold from $108.4 million in 1998 to $1.09 billion in 2007.

Our Industry

According to Wolters Kluwer Health data, the total U.S. market for pain management pharmaceuticals, excluding over-the-counter products, totaled $21.5 billion in 2007. This represents an approximately 4% compounded annual growth rate since 2003. Our primary area of focus within this market is analgesics. In 2007, analgesics were the third most prescribed medication in the United States with over 273 million prescriptions written for this classification. These products are used primarily for the treatment of pain associated with orthopedic fractures and sprains, back injuries, migraines, joint diseases, cancer and various surgical procedures.

Opioid analgesics comprised approximately 80% of the U.S. analgesics prescriptions in 2007. This market segment grew to $8.2 billion in 2007, representing a compounded annual growth rate of 6% since 2003. The growth in this segment has been primarily attributable to:


•

increasing physician recognition of the need and patient demand for effective treatment of pain;


•

aging population (according to the U.S. Census Bureau, in 2000 the population aged 65 and older reached 35 million people and is expected to grow to 40 million people by 2010, representing 14% growth over this period);


•

introduction of new and reformulated branded products; and


•

increasing incidence of chronic pain conditions, such as cancer, arthritis and low back pain.

COMPENSATION

Base Salary

Purpose. The objective of base salary is to reflect job responsibilities, value to the Company and individual performance taking into consideration market competitiveness.

Considerations. Salaries for the named executive officers are determined initially by each individual’s employment agreement, which are described under “ Employment Agreements ” below. These salaries and the amount of any increase over these salaries are determined by the Compensation Committee based on a variety of factors, including:


•

the nature and responsibility of the position and, to the extent available, salary norms for persons in comparable positions at the Data Point Companies;


•

the expertise of the individual executive;

•

the competitiveness of the market for the executive’s services;


•

internal review of the executive’s compensation, both individually and relative to other named executive officers;


•

the recommendations of the chief executive officer (except in the case of his own compensation); and


•

individual performance of the named executive officer, which includes:


•

Achievement of individual annual goals and objectives, the risks and challenges involved, and the impact of the results;


•

Performance of day-to-day responsibilities;


•

Increases in competencies and skill development;


•

Value of their contribution to function and company goal achievement; and


•

Behaviors aligned with Endo core values.

Base salaries are generally reviewed annually. In reviewing salaries, the Committee adjusts salaries from time to time to realign salaries with market levels, individual performance and incumbent experience. The Committee also considers salaries relative to those of others within the Company and may, on occasion, make adjustments to salaries or other elements of total compensation, such as incentive compensation and long-term incentive opportunities, where such an adjustment would correct a compensation imbalance, as the Committee deems appropriate.

Fiscal Year 2006 Decisions. In September 2006, at the request of the Compensation Committee, Towers Perrin provided the Compensation Committee with a market assessment of the competitive compensation for the Company’s chief executive officer. This assessment included reviewing the Data Point Companies and:


•

establishing a benchmark match for the position;


•

gathering and analyzing competitive compensation from relevant labor markets; and


•

developing competitive market medians of compensation for the benchmark position.

Based on the competitive market data referred to above, the Compensation Committee developed, with the assistance of Towers Perrin, market medians of compensation for each of Endo’s compensation elements (base salary, target annual incentive compensation, and expected value of long-term incentive compensation) and then compared Endo’s chief executive officer’s current compensation to the market median for each data sample. The data showed that Endo’s chief executive officer is compensated below the market competitive range for base salary. In light of the above, the Compensation Committee decided to transition the chief executive officer’s compensation toward the market median over a three-year period. To this end and based on a recommendation by the Compensation Committee, the Board of Directors gave Mr. Lankau a 17% increase in salary for fiscal 2007. The market data and Endo’s chief executive officer’s performance will be reviewed each year, and there is no guarantee that his compensation will be aligned with the market.

We followed a similar process with respect to establishing targeted overall compensation of our other named executive officers.

Therefore, the following changes to the base salary of the named executive officers occurred in 2006. Effective January 1, 2007, Mr. Lankau’s salary was increased to $606,000, Dr. Lee’s salary was decreased to $209,091 (based on his part-time employment agreement beginning in 2007), Ms. Manogue’s salary was increased to $375,000 and Ms. LaViscount’s salary was increased to $275,000. Mr. Rowland’s salary was set at $450,000 effective December 6, 2006, his first day at the Company.

Performance-Based Annual Cash Incentive Compensation (IC)

Purpose. The compensation program provides for an annual incentive that is performance linked. This incentive compensation, or IC, program is a short-term incentive plan that rewards achievement of annual goals and objectives. The objective of the program is to compensate individuals based on the achievement of specific goals that are intended to correlate closely with shareholder value.

Considerations. The annual cash incentive compensation includes various incentive levels based on the named executive officer’s accountability and impact on Company operations, with target award opportunities established as a percentage of base salary. Under the employment agreement for each named executive officer, a target IC bonus is established, which is determined based on all factors that the Committee deems relevant, including (but not limited to) a review of the Data Point Companies’ compensation. In fiscal 2006, these targets ranged from 30% to 50% of base salary for the Company’s named executive officers. The annual bonus process for our named executive officers involves two basic steps:


•

At the outset of the fiscal year:


(1) Set overall Company performance goals for the year; and


•

At the end of the fiscal year:


(2) Measure actual performance (individual and Company-wide) against the predetermined Company performance goals and individual performance measures to determine the appropriate award.

These two steps are further described below:

(1) Setting Company performance goals . Early in each fiscal year, the Compensation Committee, working with senior management sets performance goals for the Company. In fiscal 2006, the bonus determination for each named executive officer was primarily based upon the Company’s performance against these goals. The goals that were established for fiscal 2006 are discussed below under “Fiscal Year 2006 Decisions.”

In determining the extent to which the pre-set performance goals are met for a given period, the Committee exercises its judgment whether to reflect or exclude the impact of changes in accounting principles and extraordinary, unusual or infrequently occurring events reported in the Company’s public filings.

(2) Measuring performance. After the end of the fiscal year, the Committee reviews the Company’s actual performance against each of the performance goals established at the outset of the year. The Committee assesses the Company’s performance as well as each named executive officer’s performance against the individual goals set at the outset of the year. This assessment allows bonus decisions to take into account each named executive officer’s personal performance and contribution during the year.

Discretion. Under the IC plan, the Compensation Committee has discretion, in appropriate circumstances, to grant a lower or higher incentive payout versus target.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a specialty pharmaceutical company with market leadership in pain management. We are engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain. According to Wolters Kluwer Health data, the total U.S. market for pain management pharmaceuticals, excluding over-the-counter products, totaled $21.5 billion in 2007. This represents an approximately 4% compounded annual growth rate since 2003. Our primary area of focus within this market is analgesics and, specifically, opioid analgesics. In 2007, analgesics were the third most prescribed medication in the United States with over 273 million prescriptions written for this classification. Opioid analgesics is a segment that comprised approximately 80% of the analgesic prescriptions for 2007. Total U.S. sales for the opioid analgesic segment were $8.2 billion in 2007, representing a compounded annual growth rate of 6% since 2003.

We have a portfolio of branded products that includes established brand names such as Lidoderm ® , Opana ® ER and Opana ® , Percocet ® and Frova ® . Branded products comprised approximately 92% of our net sales in 2007, with 65% of our net sales coming from Lidoderm ® . Our non-branded generic portfolio, which accounted for 8% of net sales in 2007, currently consists of products primarily focused in pain management. We focus on selective generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing.

Our research and development effort is focused on the development of a balanced, diversified portfolio of innovative and clinically differentiated products. We are continuously seeking opportunities that deepen our penetration in the pain area. In addition, we review opportunities to enter into one or two additional specialty-focused therapeutic categories such as Central Nervous System (CNS) disorders, rheumatology, specialty psychiatry, gastroenterology, supportive care and therapeutic oncology that have the potential to provide diversification and growth, and return on investment while enhancing shareholder value. We will continue to capitalize on our core expertise with analgesics and expand our abilities to capture both earlier-stage opportunities and pursue other therapeutic areas.

We have assembled an experienced and multi-disciplined research and development team of scientists and technicians with a proven expertise working with analgesics and complex formulations. We believe this expertise allows for timely FDA approval of our products. To supplement our internal efforts, the Company engages the services of various independent research organizations, physicians and hospitals to conduct and coordinate our pre-clinical and clinical studies to establish the safety and effectiveness of new products. In addition, many of the research and development activities of products to which we have licensed the marketing rights are performed by our partners.

Our branded product pipeline includes three products in Phase III clinical trials, three products in Phase II clinical trials and one product in Phase I trials. We also have other undisclosed products in early stages of development.

We enhance our financial flexibility by outsourcing certain of our functions, including manufacturing and distribution. Currently, our primary suppliers of contract manufacturing services are Novartis Consumer Health, Inc and Teikoku Seiyaku Co., Ltd.

Through a dedicated sales force of approximately 700 sales representatives in the United States, we market our branded pharmaceutical products to high-prescribing physicians in pain management, neurology, surgery, anesthesiology, oncology and primary care. Our sales force also targets retail pharmacies and other healthcare professionals throughout the United States. We distribute our products principally through independent wholesale distributors, but we also sell directly to retailers, hospitals, clinics, government agencies and pharmacies. Our marketing policy is designed to assure that products and relevant medical information are immediately available to physicians, pharmacies, hospitals, public and private payers, and appropriate health care professionals throughout the country. The Company works to gain access to health authority, Pharmacy Benefit Managers (PBMs) and Managed Care Organizations (MCOs) formularies (lists of recommended or approved medicines and other products), including Medicare Part D plans and reimbursement lists by demonstrating the qualities and treatment benefits of its products.

On a continuous basis, we evaluate and, where appropriate, pursue acquisition opportunities. In particular, we look to continue to enhance our product line by acquiring or licensing rights to additional products and compounds and therefore regularly evaluate selective acquisition and license opportunities. Such acquisitions or licenses may be carried out through the purchase of assets, joint ventures and licenses or by acquiring other companies.

Our wholly-owned subsidiary, Endo Pharmaceuticals Inc. (EPI), commenced operations in 1997 by acquiring certain pharmaceutical products, related rights and assets of The DuPont Merck Pharmaceutical Company, which subsequently became DuPont Pharmaceuticals Company and was thereafter purchased by the Bristol-Myers Squibb Pharma Company in 2001. Endo Pharmaceuticals Inc. was formed by some members of the then-existing management of DuPont Merck and an affiliate of Kelso & Company who were also parties to the purchase agreement, under which we acquired these initial assets. We were incorporated in Delaware as a holding company on November 18, 1997.

Recent Developments

In February 2008, we amended our license agreement with Vernalis dated July 14, 2004. In addition to amending certain specific terms and conditions of the license agreement, this amendment sets forth an annual minimum net sales threshold that must be achieved prior to any royalties becoming due. Once the annual minimum net sales threshold is reached, royalty payments will be due on the portion of annual net sales that exceed the threshold. In addition, both parties agreed to terminate the co-promotion agreement effective in February 2008. Also in February 2008, we entered into a termination agreement with Vernalis to terminate the existing loan agreement between the parties. Pursuant to the termination agreement, payment of our outstanding note receivable was satisfied by a cash payment from Vernalis of $7 million and by way of a reduction in royalties payable to Vernalis pursuant to the amended license agreement as described above.

In February 2008, we along with our partner Penwest, received a notice from Actavis South Atlantic LLC advising of the filing by Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for oxymorphone hydrochloride extended-release tablets CII. The Actavis Paragraph IV certification notice refers to Penwest’s U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456, and 7,276,250, which cover the formulation of Opana ® ER. These patents are listed in the FDA’s Orange Book and expire in 2008, 2013, 2013, and 2023, respectively. In addition to these patents, Opana ® ER has a new dosage form (NDA) exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. The Company and Penwest are currently reviewing the details of this ANDA from Actavis. The Company and Penwest intend to pursue all available legal and regulatory avenues in defense of Opana ® ER, including enforcement of their intellectual property rights and approved labeling.

In January 2008, Peter A. Lankau resigned as President and Chief Executive Officer of the Company effective March 1, 2008. Mr. Lankau also resigned from the Company’s board of directors effective January 28, 2008. Nancy Wysenski, Endo’s Chief Operating Officer, and Charles A. Rowland, Jr., Endo’s Executive Vice President, Chief Financial Officer and Treasurer, have assumed day-to-day leadership responsibilities on an interim basis until a successor is appointed. Ms. Wysenski will also be coordinating responsibilities of the other members of the senior executive team. Roger Kimmel, Chairman of the Board, and two other independent directors, George F. Horner, III and Clive A. Meanwell, M.D., Ph.D. will liaison with Ms. Wysenski and Mr. Rowland until a successor is appointed. The Board of Directors is currently conducting a search for a new CEO.

On December 14, 2007, the Company received a notice from IMPAX advising of the FDA’s apparent acceptance for substantive review, as of November 23, 2007, of IMPAX’s amended ANDA for generic versions of Opana ® ER. IMPAX stated in its letter that the FDA requested IMPAX to provide notification to the Company and Penwest of any Paragraph IV certifications submitted with its ANDA, as required under section 355(j) of the Act. Accordingly, IMPAX’s letter included notification that it had filed Paragraph IV certifications with respect to Penwest’s U.S. Patent Nos. 7,276,250, 5,958,456 and 5,662,933, which cover the formulation of Opana ® ER. These patents are listed in the FDA’s Orange Book and expire in 2022, 2013 and 2013, respectively. The Company’s Opana ® ER product has new dosage form exclusivity that prevents final approval of any ANDA by the FDA until the exclusivity expires on June 22, 2009. In addition, because IMPAX’s application referred to patents owned by Penwest Pharmaceuticals, Inc., the Company’s marketing partner for Opana ® ER, and contained a Paragraph IV certification under section 355(j) of the Act, we believe IMPAX’s notice triggered the 45-day period under the Act in which the Company and Penwest could file a patent infringement action and trigger the automatic 30-month stay of approval. Subsequently, on January 25, 2008, the Company and Penwest filed a lawsuit against IMPAX in the United States District Court for the District of Delaware in connection with IMPAX’s ANDA. The lawsuit alleges infringement of certain Orange Book-listed U.S. patents that cover the Opana ® ER formulation. Additionally, the lawsuit previously filed by the Company and Penwest on November 15, 2007 against IMPAX remains pending. We cannot predict the outcome of this litigation.

In December 2007, we entered into a license, development and supply agreement with Alexza Pharmaceuticals, Inc. (Alexza) for the exclusive development and commercialization rights in North America for Alexza’s AZ-003 (Staccato ® fentanyl) (Alexza Agreement). Currently in Phase I clinical development, AZ-003, now named EN3294, is the combination of Alexza’s proprietary Staccato ® system with fentanyl, a drug belonging to the class of compounds known as opioid analgesics. EN3294 is a hand-held, electrically heated, multiple-dose inhaler designed to generate and deliver excipient-free fentanyl aerosol for deep lung delivery. The current product candidate consists of a disposable dose cartridge containing 25 doses each of 25 mcg fentanyl, which is inserted into a reusable controller. Development of additional dosage strengths and quantities is anticipated. The controller consists of software and hardware designed to allow safe, patient-controlled delivery of the drug. Since the Staccato ® system can be designed to incorporate a variety of lockout and dosing features, Alexza believes that EN3294 may reduce the potential for abuse and diversion, and facilitate patient-dose titration to the minimum effective drug dose in a simple, convenient and easy-to-use delivery system. EN3294 is patent protected until 2022. Under the terms of the Alexza Agreement, Endo paid Alexza an upfront fee of $10 million, with additional payments of approximately $40 million becoming due upon achievement of predetermined regulatory and commercial milestones. Endo will also pay royalties to Alexza on net sales of EN3294. Endo will assume responsibility for, and funding of, all remaining clinical trial development and regulatory filings. Alexza will manufacture the product for Endo and will be responsible for completing development of the device.

In December 2007, we entered into a license, development and supply agreement with an undisclosed third party collaborative partner for the exclusive clinical development and commercialization rights in Canada and the United States for a certain technology to be utilized in our various product development activities. Under the terms of this agreement the collaborative partner will be responsible for development efforts to conduct pharmaceutical formulation development and will manufacture any such product or products which obtain FDA approval. Endo will be responsible for conducting clinical development activities and for all development costs incurred to obtain regulatory approval. Pursuant to this agreement, we expensed upfront fees of $18.9 million as research and development during the year ended December 31, 2007. In the first quarter of 2008, a $2 million milestone payment became payable and additional payments of approximately 74.8 million euros may become due upon achievement of predetermined regulatory and commercial milestones. Endo will also make payments to the collaboration partner based on net sales of any such product or products commercialized under this agreement.

In December 2007, we reported positive results from the previously announced, planned interim statistical analysis of a Phase III, placebo-controlled, double-blind trial of its development product, Rapinyl TM . The data from the analysis of 61 patients demonstrated that Rapinyl TM met its primary endpoint, the Sum of Pain Intensity Difference from baseline to 30 minutes (SPID 0-30), and the results were highly statistically significant (p=0.0004). In addition, all the secondary endpoints were met. Statistically significant separation from placebo on mean pain intensity difference was seen as early as 10 minutes. On the basis of these results and in accordance with the predetermined criteria of the interim analysis, Endo terminated enrollment in the double-blind crossover portion of this clinical study. Enrollment in the safety portion of this trial and a second Phase III trial is continuing in order to meet the requirements for safety data to be included in a future New Drug Application filing. Rapinyl TM is an oral, fast-dissolving tablet of fentanyl intended for the treatment of breakthrough cancer pain. Endo licensed the exclusive rights to develop and market Rapinyl TM in North America from Orexo AB.

In December 2007, we initiated the first of two Phase III clinical studies in the fourth quarter of 2007 for EN3285, a topical oral-rinse in development for the prevention or delay of severe oral mucositis (OM), painful mouth sores that often occur in cancer patients undergoing radiation and chemotherapeutic treatment. Endo has agreed to the trial design with the FDA under the Special Protocol Assessment (SPA) process. Under the terms of the SPA, Endo will initiate a multicenter, double-blind, placebo-controlled trial in approximately 240 OM patients undergoing chemoradiation therapy for head and neck cancer. A second Phase III study is expected to begin during the first half of 2008. The FDA will require two Phase III, double-blind, placebo-controlled trials as the basis for an NDA for this indication.

In November 2007, we announced that our topical ketoprofen patch achieved positive results for a four-week, double-blind, placebo-controlled efficacy trial evaluating this once-daily analgesic patch in 309 patients with osteoarthritis flare of the knee. This trial represented the first part of a three-month safety study of the product (the final two months of the study were an open-label extension). The double-blind, placebo-controlled portion of the study met its predetermined primary objective: statistically significant difference from placebo at day 14 in the Western Ontario and McMaster University Osteoarthritis (WOMAC) pain sub-scale (p=0.014). Significant treatment differences were observed at all measurement points in this parameter during the double-blind phase. Secondary outcomes, including physician global assessment of study medication and Knee injury and Osteoarthritis Outcome Score (KOOS) sub-scales (pain, symptoms and function), also demonstrated statistically significant differences from placebo. Pain relief was sustained throughout the open-label phase. As Endo previously disclosed, two earlier Phase III double-blind, placebo-controlled clinical trials in patients with ankle sprains and strains and in patients with tendonitis or bursitis of the shoulder, elbow or knee did not meet their primary endpoints. As a result, in July 2007, the Company announced that it has withdrawn its guidance pertaining to the anticipated first-half 2008 filing date of its New Drug Application (NDA) for the topical ketoprofen patch. We are analyzing the results of these two failed Phase III clinical trials and the positive results from the four-week, double-blind, placebo-controlled efficacy trial. The third Phase III study of the original Phase III program, which evaluated the ketoprofen patch in the treatment of pain associated with tendonitis or bursitis of the shoulder, elbow or knee, has been recently concluded and analysis of its findings will be initiated shortly. Additionally, an open-label, Phase III long-term (three months) study evaluating the safety of the ketoprofen patch in patients with osteoarthritis flare in the knee has completed enrollment. Following a full analysis of the aforementioned studies, we plan to initiate a new Phase III program.

In September 2007, we announced that the FDA identified deficiencies and asked for additional information pertaining to our supplemental New Drug Application (sNDA) for Frova ® (frovatriptan succinate) 2.5 mg tablets in a “not approvable” letter. The sNDA is for the additional indication of Frova ® for the short-term (six days per month) prevention of menstrual migraine. Frova ® is already approved and marketed for the acute treatment of migraine with or without aura in adults where a clear diagnosis of migraine has been established. While the FDA acknowledged that both pivotal efficacy trials that had been submitted as part of this sNDA met their primary endpoints in significantly improving the number of headache-free perimenstrual periods (PMPs), it questioned whether the benefit demonstrated was clinically meaningful. The FDA also expressed concern about the potential for increased risk of serious vascular adverse events, though none were observed in the clinical development program. We and our development partner Vernalis Plc, are continuing to evaluate the points raised in the FDA notification, and we are currently determining the appropriate course of action.

In September 2007, we announced the appointment of Nancy J. Wysenski as Chief Operating Officer. Ms. Wysenski has 30 years of health care industry experience, most recently as President of EMD Pharmaceuticals, Inc., the U.S. subsidiary of Merck KGaA.

In July 2007, Vernalis Development Limited (“Vernalis”) and Endo entered into Amendment No. 3 (Amendment) to the License Agreement dated July 14, 2004. Under the Amendment, Vernalis granted to Endo, a sole and exclusive (even as against Vernalis) license to make, have made, use, commercialize and have commercialized the product Frova ® (frovatriptan) in Canada, under the Canadian Trademark.

In July 2007, Novopharm Limited (“Novopharm”) and Endo entered into a License Agreement (the “Novopharm Agreement”) whereby Endo granted to Novopharm the exclusive right to use, import, sell, have sold, offer to sell, distribute, market, promote and otherwise exploit the product Frova ® (frovatriptan) in Canada. Novopharm has paid to the Company an upfront and milestone payments license fee of approximately $0.5 million and agreed to make additional milestone payments totaling $0.4 million upon the occurrence of certain events or based on the passage of time. In addition to the milestone payments, Novopharm will pay to Endo royalties based on a certain percentage of net sales as defined in the Novopharm Agreement. The term of the Novopharm Agreement will continue until the later to occur of 10 years after its July 2007 effective date or the expiration of the last Frova ® patent in Canada. We have the right after December 31, 2010 to terminate the Novopharm Agreement upon one hundred eighty (180) days, prior written notice to Novopharm, and may be required to make annual royalty payments to Novopharm for a period of up to three years after such termination on any sales in Canada made by Endo or any of its affiliates during that three-year period.

In April 2007, the Company and Teikoku Seiyaku Co., Ltd. / Teikoku Pharma USA, Inc. (collectively, “Teikoku”) amended their Supply and Manufacturing Agreement dated as of November 23, 1998 by and between Endo and Teikoku, pursuant to which Teikoku manufactures and supplies Lidoderm ® (lidocaine patch 5%) (the “Product”) to Endo. This amendment is referred to as the Amended Agreement. The material components of the Amended Agreement are as follows:


•

We have agreed to purchase a minimum number of patches per year through 2012, representing the noncancelable portion of the Amended Agreement.




•


Teikoku has agreed to fix the supply price of Lidoderm ® for a period of time after which the price will be adjusted at future dates certain based on a price index defined in the Amended Agreement. Since future price changes are unknown, we have used prices currently existing under the Amended Agreement, and estimated our minimum purchase requirement to be approximately $32 million per year through 2012. The minimum purchase requirement shall remain in effect subsequent to 2012, except that Endo has the right to terminate the Amended Agreement after 2012, if we fail to meet the annual minimum requirement.




•


Following cessation of our obligation to pay royalties to Hind Healthcare Inc. (“Hind”) under the Sole and Exclusive License Agreement dated as of November 23, 1998, as amended, between Hind and Endo, we will pay to Teikoku annual royalties based on our annual net sales of the Lidoderm ® .


•

The Amended Agreement will expire on December 31, 2021, unless terminated in accordance with its terms. Either party may terminate this Agreement, upon thirty (30) days written notice, in the event that Endo fails to purchase the annual minimum quantity for each year after 2012 (e.g., 2013 through 2021). Notwithstanding the foregoing, after December 31, 2021, the Amended Agreement shall be automatically renewed on the first day of January each year unless (i) we and Teikoku agree to terminate the Amended Agreement upon mutual written agreement or (ii) either we or Teikoku terminates the Amended Agreement with 180-day written notice to the other party, which notice shall not in any event be effective prior to July 1, 2022.

In April 2007, we announced that Carol A. Ammon, Founder and Chairman of the Board, had informed the Company that she had decided to retire, effective May 30, 2007, from her position as Endo’s Chairman to devote more time to her philanthropic activities, and accordingly, did not run for re-election to the Company’s board of directors. The Company also announced that Roger H. Kimmel, an independent director of Endo since 2000, had been appointed by the Board to serve as Chairman, effective May 30, 2007.

In January 2007, the Company and Penwest entered into an amendment (the 2007 Amendment) to the 2002 amended and restated strategic alliance agreement between the parties (the 2002 Agreement). Under the terms of the 2007 Amendment, Endo and Penwest agreed to restructure the 2002 Agreement to provide that royalties payable to Penwest for U.S. sales of Opana ® ER will be calculated based on net sales of the product rather than on operating profit, and to change certain other provisions of the 2002 Agreement. The 2007 Amendment also resolved the parties’ ongoing disagreement with regard to sharing of marketing expenses during the period prior to when Opana ® ER reaches profitability. The key financial terms of the 2007 Amendment are summarized as follows:




•


With respect to U.S. sales of Opana ® ER, Endo’s royalty payments to Penwest will be calculated starting at 22% of annual net sales of the product, and, based on agreed-upon levels of annual net sales achieved, the royalty rate can increase to a maximum of 30%.

•

No royalty payments will be due to Penwest for the first $41 million of royalties that would otherwise have been payable beginning from the time of the product launch in July 2006.


•

Penwest is entitled to receive milestone payments of up to $90 million based upon the achievement of certain agreed-upon annual sales thresholds.




•


In 2003, Penwest opted out of funding development costs for Opana ® ER. Under the 2007 Amendment, the parties have agreed that Penwest’s share of these unfunded development costs will be fixed at $28 million and will be recouped by Endo through a temporary 50% reduction in royalties payable to Penwest. This temporary reduction in royalties will not apply until the $41 million royalty threshold referred to above has been met

As a result of the terms described above, the Company anticipates that no royalties are or will be due on the first $186.3 million of net sales of Opana ® ER as we recoup our previously recognized launch expenses. After this initial $186.3 million of net sales, royalties will be reduced by fifty percent (50%) until we recoup our previously recognized certification period expenses, after which time royalties will be payable on annual net sales based on the royalty rates described above.

In January 2007, following an assessment of the status of DepoDur ® , we announced that we notified SkyePharma PLC of our intent to terminate our development and commercialization agreement for this product and, in February 2007, entered into a termination agreement with SkyePharma whereby the Development and Marketing Strategic Alliance Agreement was terminated in its entirety on March 31, 2007. In order to provide for the continued commercial support of the DepoDur ® product and the transition of such product to SkyePharma on March 31, 2007, Endo provided a number of services and undertook certain activities. Specifically, Endo employed commercially reasonable efforts to maintain and continue all U.S. commercial activities in support of DepoDur ® through March 31, 2007 and supported and/or undertook the transition of certain Endo functions and activities (including third party activities) to SkyePharma that were useful and necessary for SkyePharma to assume commercial and related responsibilities for DepoDur ® in the U.S. All such transition services and activities were completed by March 31, 2007.

In January 2007, we received a subpoena issued by the United States Department of Health and Human Services, Office of Inspector General (OIG). The subpoena requests documents relating to Lidoderm ® (lidocaine patch 5%), focused primarily on the sale, marketing and promotion of Lidoderm ® . We are cooperating with the government to provide the requested documents. At this time, we cannot predict or determine the outcome of the above matter or reasonably estimate the amount or range of amounts of fines or penalties, if any, that might result from an adverse outcome.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations for the Three and Nine Months Ended September 30, 2007 Compared to the Three and Nine Months Ended September 30, 2006

Our quarterly results have fluctuated in the past, and may continue to fluctuate. These fluctuations are primarily due to the timing of new product launches, purchasing patterns of our customers, market acceptance of our products, the impact of competitive products and pricing as well as charges incurred for compensation related to stock options and compensation paid by Endo Pharma LLC, impairment of intangible assets, purchased in-process research and development charges and certain upfront, milestone and certain other payments made or accrued pursuant to acquisition or licensing agreements.

Net Sales . Net sales for the three and nine months ended September 30, 2007 increased by $52.3 million or 24%, and $130.8 million or 20%, respectively, compared to the same periods of 2006. This increase in net sales is primarily driven by increased sales of Lidoderm ® as well as sales of Opana ® and Opana ® ER, which were launched in the second half of 2006. These increases are partially offset by the reduction in sales of our generic oxycodone extended-release tablets, resulting from the Company’s settlement with Purdue (as described in more detail below). For the three months ended September 30, 2007, increased sales volume contributed 19% of the total sales growth of 24%, while selling price increases contributed the remaining 5% of the total sales growth. For the nine months ended September 30, 2007, increased sales volume contributed 14% of the total sales growth of 20%, while selling price increases contributed the remaining 6% of the total sales growth. The volume growth for the three and nine months ended September 30, 2007 includes the unfavorable impact of reduced inventories at our major wholesaler customers. We believe this decline in inventory levels at these wholesalers is due to improved distribution efficiencies, resulting in their ability to maintain lower levels of inventory on-hand.

Lidoderm ® . Net sales of Lidoderm ® for the three and nine months ended September 30, 2007 increased by $46.9 million or 37%, and $103.6 million or 26%, respectively, over the comparable periods of 2006. The increase is primarily attributable to continued prescription growth of the product during both the third quarter and nine months ended September 30, 2007. We believe the continued growth of Lidoderm ® is driven by the product’s proven clinical effectiveness combined with the expansion of our sales force in 2006.

Percocet ® . Net sales of Percocet ® for the three and nine months ended September 30, 2007 increased by $6.4 million or 25%, and $16.3 million or 22%, respectively, over the comparable periods of 2006. The increase is primarily attributable to improved pricing during both the third quarter and nine months ended September 30, 2007.

Frova ® . Net sales of Frova ® for the three and nine months ended September 30, 2007 increased by $4.4 million or 48%, and $9.3 million or 32%, respectively, over the comparable periods of 2006. The growth in net sales is primarily attributable to continued prescription growth of the product, as we continue to drive our promotional efforts through our expanded sales force.

Opana ® ER and Opana ® . Net Sales of Opana ® ER and Opana ® for the three and nine months ended September 30, 2007 were completely incremental over the comparable 2006 period as these products were not launched until the second half of 2006. Net sales of Opana ® and Opana ® ER for the nine months ended September 30, 2007 includes $13.8 million of deferred revenue recognized during the first quarter of 2007 for commercial shipments made to customers during 2006.

Generics . Net sales of our generic products for the three and nine months ended September 30, 2007 decreased by $29.3 million or 56%, and $73.6 million or 52%, respectively, over the comparable periods of 2006. The decrease is primarily attributable to the fact that sales of our generic oxycodone extended-release tablets ceased on December 31, 2006. In addition, continued generic competition for these generic products also contributed to the decrease in sales over the comparable periods of 2006. Generic competition with our products may have a material impact on our results of operations and cash flows in the future.

2007 Outlook . Due primarily to our strong year-to-date results and the expected increases in the net sales of Lidoderm ® and Opana ® ER and Opana ® , we expect net sales in 2007 to be approximately $1.050 billion and $1.075 billion. There can be no assurance of Endo achieving these results.

Gross Profit. Gross profit for the three and nine months ended September 30, 2007 increased by $47.0 million, or 27%, and $122.8, or 24%, respectively, over the comparable 2006 period. The Company’s gross profit does not include amortization expense of intangible assets related to commercial products. Amortization expense related to these intangible assets for the three months ended September 30, 2007 and 2006 is approximately $1.2 million and $2.0 million, respectively. For the nine months ended September 30, 2007 and 2006, amortization expense related to these intangible assets is approximately $3.7 and $5.5, respectively. Diversity in practice exists with respect to the inclusion of amortization expense of intangible assets in cost of sales and therefore such a lack of consistency should be considered when comparing cost of sales and gross profit amounts to other companies. Gross profit margins, excluding amortization expense of intangible assets related to commercial products, increased to 82% and 81% from 80% and 78% in the comparable 2006 three and nine month periods. This increase is primarily attributable to a favorable mix of product revenues, as we derived a higher proportion of total revenue from higher margin branded products compared to revenues in the comparable 2006 periods. Partially offsetting this favorability was the impact of royalties payable to Vernalis for sales of Frova ® , which are included in cost of sales. The requirement to pay royalties to Vernalis began in 2007. We expect to continue to benefit from this favorable product mix for the remainder of 2007, as higher-margin branded products will continue to represent a higher proportion of total revenue when compared to 2006. However, this favorability is expected to be partially offset by a decrease in our average selling price as we pursue contracting activities, particularly with managed care organizations, throughout the remainder of 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended September 30, 2007 increased by 22% to $107.4 million, and 14% to $287.2 million, respectively, from the comparable 2006 periods. This increase is primarily due to an increase in sales and promotional efforts in 2007 over the comparable 2006 period due to our continued investment in our commercial business and our infrastructure to support our products and pipeline, including the addition of approximately 220 sales representatives, occurring in the second half of 2006, the pre-launch expenses for Frova ® (MM) and the continued launch expenses of Opana ® ER and Opana ® . During 2007, selling, general and administrative expenses are expected to rise due to increased promotional support behind Endo’s key on-market products, including the full-year impact of the expansion of the sales force that occurred in the second half of 2006, combined with continuing investments in infrastructure to support Endo’s long-term growth including the addition of approximately 100 sales representatives during the second half of 2007. Selling, general and administrative expenses for the nine months ended September 30, 2006 includes compensation expense and the related employer payroll taxes of approximately $41.3 million related to the one-time bonuses Endo Pharma LLC, a limited liability company that is no longer affiliated with the Company, but had historically held significant portions of our common stock, in which affiliates of Kelso & Company and certain current and former members of management have an interest, paid to certain of our executives.

Research and Development Expenses. Research and development expenses increased to $26.9 million from $14.5 million, and to $79.6 million from $59.4 million, for the three and nine months ended September 30, 2007, respectively, over the comparable 2006 periods. This increase is primarily attributable to the ongoing clinical development of Rapinyl TM , our topical ketoprofen patch, our transdermal sufentanil patch and EN 3285, our oral rinse for the treatment of oral mucositis obtained through our acquisition of RxKinetix in October 2006.

In 2007, we expect to direct the majority of our incremental research and development spending on the ongoing clinical trials for Rapinyl TM , the topical ketoprofen patch, the transdermal sufentanil patch and EN 3285. Additionally, we expect to increase our investment in post-marketing clinical studies in support of our on-market products.

Depreciation and Amortization. Depreciation and amortization for the three and months ended September 30, 2007 increased to $5.1 million from $4.6 million and to $13.0 from $12.9 million, for the three and nine months ended September 30, 2007, respectively, over the comparable 2006 periods primarily due to an increase in depreciation expense as a result of an increase in capital expenditures. This increase was partially offset by a decrease in amortization expense primarily due to reduced intangible asset balances as a result of the impairment charges recorded in the fourth quarter of 2006 related to the SkyePharma and ZARS intangible assets (DepoDur ® and Synera ™ , respectively). We expect depreciation and amortization will increase from current levels as we increase our capital expenditures and as we continue to license in products and technologies.

Interest Income, Net. Interest income, net for the three months ended September 30, 2007 increased to $9.7 million from $6.9 million in the comparable 2006 period. For the nine months ended September 30, 2007, interest income increased to $25.0 million from $17.1 million in the comparable 2006 period. This change is due to the increased interest income earned as a result of higher cash and marketable securities balances and higher returns earned during the third quarter and nine months ended September 30, 2007 compared to the same periods of the prior year. During the second quarter of 2007, the Company began investing in marketable securities. Our investments in marketable securities are governed by our investment policy, which has been approved by our Board of Directors. Our investment policy seeks to preserve the value of capital, consistent with maximizing return on the Company’s investment, while maintaining adequate liquidity.

Income Tax. Income tax for the three months ended September 30, 2007 increased to $30.9 million from $27.7 million in the comparable 2006 period. Income tax expense for the nine months ended September 30, 2007 increased to $97.8 million from $76.0 million in the comparable 2006 period. The increase in income tax expense for the three and nine months ended September 30, 2007 is primarily a result of the increase in income before income tax for the three and nine months ended September 30, 2007 compared to the comparable periods in 2006. The impact of the increase in income before income tax is partially offset by a reduction in our effective tax rate. Our effective tax rate for the three months ended September 30, 2007 decreased to 34.3% from 38.2% in the comparable period of 2006, while our effective rate for the nine months ended September 30, 2007 decreased to 35.6% from 38.2% in the comparable period of 2006. The decrease in the effective income tax rate is primarily related to certain compensation charges recorded in 2006 that were not deductible for income tax purposes and tax-free interest income earned in 2007.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations. Our principal liquidity requirements are for working capital for operations, acquisitions, licenses, milestone payments and capital expenditures.

During the second quarter of 2007, the Company began investing in marketable securities. Our investments in marketable securities are governed by our investment policy, which has been approved by our Board of Directors. Our investment policy seeks to preserve the value of capital, consistent with maximizing return on the Company’s investment, while maintaining adequate liquidity . During the nine months ended September 30, 2007 cash and cash equivalents decreased by $353.2 million, primarily as a result of our investment in marketable securities offset by the cash generated by our operating activities. As of September 30, 2007, our combined cash and cash equivalents and current marketable securities balance has reached a total of $882.9 million. These funds, in addition to our cash generated from future operations are expected to be sufficient to meet our normal operating, investing and financing requirements in the foreseeable future, including the funding of our pipeline research and development projects in the event that our collaboration partners are unable or unwilling to fund their portion of any particular project. We may use a portion of our cash and cash equivalents for possible acquisitions and licensing opportunities.

Significant changes in operating cash flow line items include a $53.8 million increase in net income and a $4.3 million increase in the operating cash flow impact of the changes in operating assets and liabilities, offset by changes in other items reconciling net income to cash provided by operating activities, the largest of which is a $41.3 million decrease in the operating cash flow impact related to selling, general and administrative expenses to be funded by Endo Pharma LLC. During the nine months ended September 30, 2006, due to Endo Pharma LLC’s payment of one-time bonuses, the Company recorded in selling, general and administrative expense, executive compensation of $41.3 million for one-time cash bonuses paid to each of Ms. Carol Ammon, our former Chairman of the Board and former Chief Executive Officer, Mr. Peter Lankau, our President and Chief Executive Officer, Ms. Caroline Manogue, our Executive Vice President, Chief Legal Officer and Secretary, and Mr. Jeffrey Black, our former Executive Vice President, Chief Financial Officer and Treasurer. These bonus payments were made by the Company in April 2006 and repaid to us by Endo Pharma LLC in the third quarter of 2006 with interest. The cash flow impact of the changes in operating assets and liabilities is primarily attributable to the following items: (1) a $34.0 million increase in the cash flow impact of accounts receivable as a result of the timing and volume of our sales during the nine months ended September 30, 2007 when compared to the nine months ended 2006 and due to the overall reduction in days sales outstanding, discussed in more detail under the Working Capital section below; (2) a $37.2 million increase in the cash flow impact of accrued expenses primarily due to the decrease in revenue reserves from December 31, 2005 to September 30, 2006 related to our generic oxycodone extended-release tablets. Our generic oxycodone extended-release tablets were launched in June 2005 with a 180-day market exclusivity period. Immediately following the expiration of our market exclusivity period, other generic competitors entered the marketplace causing a sharp decline in sales of our generic oxycodone extended-release tablets which resulted in a corresponding decline in the level of required revenue reserves; (3) a $5.6 million increase in the cash flow impact of amounts due to Endo Pharma LLC due to the timing of reimbursements from Endo Pharma LLC with respect to the executive compensation discussed above; (4) a $85.5 million decrease in the cash flow impact related to income taxes, due to the receipt of an income tax refund in 2006 as a result of the significant tax deductions generated in 2005 from the exercises of 22.2 million Endo Pharma LLC stock options; and (5) a $5.0 million increase in the cash flow impact of inventories primarily due to the fact that sales of our generic oxycodone extended-release tablets ceased on December 31, 2006.

Net Cash Used in Investing Activities. Net cash used in investing activities increased to $630.6 million for the nine months ended September 30, 2007 from $41.7 million for the nine months ended September 30, 2006. Beginning in June 2007, the Company initiated an investment strategy with the intent to maximize investment returns while preserving capital and maintaining adequate liquidity. During the nine months ended September 30, 2007, purchases of marketable securities classified as available-for-sale, totaled $676.1 million, and sales of marketable securities classified as available-for-sale totaled $63.0 million. Also, during the nine months ended September 30, 2007, the Company paid $15.9 million for capital expenditures and invested an additional $2.8 million in Life Sciences Opportunities Fund (Institutional) II, L.P.( the “Fund”), bringing our total cash investment to $5.5 million as of September 30, 2007. In addition, during the second quarter of 2007, we received $1.1 million from the Fund accounted for as a return of capital. During the nine months ended September 30, 2006, the Company paid $8.9 million for capital expenditures and $32.9 million for the purchase of a license right.

Net Cash Used in Financing Activities. Net cash used in financing activities decreased to $10.0 million for the nine months ended September 30, 2007 from $60.2 million for the nine months ended September 30, 2006. The decrease is primarily due to a $20.0 million payment to Endo Pharma LLC pursuant to the tax sharing agreement compared to a $96.7 million payment in 2006 partially offset by a $28.4 million decrease in the cash flow impact related to the tax benefits of stock options exerci

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

2817 Views