SOURCE: Endo Pharmaceuticals

February 22, 2007 07:00 ET

Endo Pharmaceuticals Reports Fourth Quarter and Full-Year 2006 Financial Results

CHADDS FORD, PA -- (MARKET WIRE) -- February 22, 2007 -- Endo Pharmaceuticals Holdings Inc. (NASDAQ: ENDP), a specialty pharmaceutical company with market leadership in pain management, today reported financial results for the fourth quarter and full year ended December 31, 2006.

Net sales for the fourth quarter were $259.5 million compared with $240.8 million in the fourth quarter of 2005. Net income was $14.8 million for the three months ended December 31, 2006 compared with $72.9 million in the comparable 2005 period due to one-time adjustments detailed below. As detailed in the Supplemental Financial Information below, adjusted net income for the three months ended December 31, 2006 was $56.7 million compared with $77.8 million in the same period in 2005 due to one-time adjustments detailed below.

Diluted earnings per share for the three months ended December 31, 2006 were $0.11 compared with $0.54 in the comparable 2005 period. As detailed in the Supplemental Financial Information below, adjusted diluted earnings per share for the three months ended December 31, 2006 were $0.42 compared with $0.58 in the same period in 2005.

The 2006 fourth quarter net income and earnings per share included $31.3 million in impairment charges related to the company's decision to discontinue promotion of DepoDur® and an impairment of the Synera™ intangible asset resulting from the redeployment of Endo's hospital sales force, and a $26.0 million charge for the write-off of purchased in-process research and development in connection with the October 2006 acquisition of RxKinetix, Inc.

Full-Year Results

Net sales for the year ended December 31, 2006 were $909.7 million compared with $820.2 million for the year ended December 31, 2005. Net income for the year ended December 31, 2006 was $137.8 million versus $202.3 million in the comparable 2005 period. As detailed in the Supplemental Financial Information below, due to the aforementioned and other one-time adjustments, adjusted net income for the year ended December 31, 2006 was $220.8 million compared with $230.2 million in the same period of 2005.

Diluted earnings per share for the year ended December 31, 2006 were $1.03 compared with $1.52 in the comparable 2005 period. As detailed in the Supplemental Financial Information below, adjusted diluted earnings per share for the year ended December 31, 2006 were $1.65 compared with $1.73 in the same period in 2005.

"2006 was a year of progress for Endo, in which we launched three new pain management products, expanded our commercial capabilities, continued to advance our pipeline, and acquired a supportive care oncology platform," said Peter A. Lankau, President and Chief Executive Officer. "In 2007, we will make substantial investments in support of our on-market products, our development portfolio and additional infrastructure to support our growth in the years ahead. With our substantial cash position and debt-free balance sheet, we are well positioned to pursue complementary acquisitions and licensing opportunities that will further expand our product portfolio and sustain our long-term growth."

Use of Non-GAAP Measures -- Adjusted Net Income and Adjusted Diluted Earnings per Share:

Adjusted Net Income and Adjusted Diluted Earnings per Share are non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with accounting principles generally accepted in the United States and may be different from non-GAAP financial measures used by other companies. Endo refers to these non-GAAP financial measures in making operating decisions because it believes they provide meaningful supplemental information regarding the company's operational performance. For instance, Endo believes that these non-GAAP financial measures facilitate its internal comparisons to its historical operating results and comparisons to competitors' results. The company includes these non-GAAP financial measures in its earnings announcements because it believes they are useful to investors in allowing for greater transparency related to supplemental information used by Endo in its financial and operational decision-making. In addition, Endo has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting at this time. Further, Endo believes that these non-GAAP financial measures may be useful to investors as it is aware that certain of its significant stockholders utilize these measures to evaluate its financial performance. Finally, these measures are considered by the Compensation Committee of Endo's Board of Directors in assessing the performance and compensation of substantially all of its employees, including its executive officers. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this earnings announcement to their most directly comparable GAAP financial measures as provided with the financial statements included in this press release.

Supplemental Financial Information

A reconciliation of net income as determined by GAAP to adjusted net income for the three months ended December 31, 2006 and December 31, 2005 is as follows:


                                                     (Unaudited)
                                                  Three Months Ended
                                                     December 31,
                                           -------------------------------
                                                2006             2005
                                           --------------   --------------
                                                   (in thousands,
                                                  except per share
                                                        data)

GAAP net income                            $       14,774   $       72,881
   Add: Income tax                                 19,858           42,630
                                           --------------   --------------
GAAP income before income tax                      34,632          115,511
   Add: Compensation expense and related
    employer payroll taxes to be funded by
    Endo Pharma LLC                                   234            7,669
   Add: Upfront and milestone payments to
    partners                                          250              750
   Add: Stock compensation expense related
    to adoption of SFAS 123R                        3,035                -
   Add: Impairment of other intangible
    assets                                         31,263                -
   Add: Purchased in-process research and
    development                                    26,046                -
   Less: Reversal of contingent liability          (6,808)               -
   Less: Reversal of the remaining reserve
    related to the transdermal fentanyl
    patch inventory                                     -             (679)
                                           --------------   --------------
Adjusted income before income tax                  88,652          123,251
   Pro forma income tax                            31,924           45,486
                                           --------------   --------------
Adjusted net income                        $       56,728   $       77,765
                                           ==============   ==============

Diluted weighted average shares
 outstanding                                      134,221          133,744

Adjusted diluted earnings per share        $         0.42   $         0.58
                                           ==============   ==============
A reconciliation of net income as determined by GAAP to adjusted net income for the year ended December 31, 2006 and December 31, 2005 is as follows:

                                                     (Unaudited)
                                                     Year Ended
                                                     December 31,
                                           -------------------------------
                                                2006             2005
                                           --------------   ---------------
                                                   (in thousands,
                                                  except per share
                                                        data)

GAAP net income                            $      137,839   $       202,295
   Add: Income tax                                 95,895           121,949
                                           --------------   ---------------
GAAP income before income tax                     233,734           324,244
   Add: Compensation expense and related
    employer payroll taxes to be funded
    by Endo Pharma LLC                             42,619             7,669
   Add: Upfront and milestone payments to
    partners                                       10,650            27,250
   Add: Stock compensation expense related to
    adoption of SFAS 123R                          12,372                 -
   Add: Impairment of other intangible
    assets                                         31,263             5,515
   Add: Purchased in-process research and
    development                                    26,046                 -
   Add: Write-off of transdermal fentanyl
    patch inventory                                     -             4,321
   Less: Reversal of contingent liability          (6,808)                -
                                           --------------   ---------------
Adjusted income before income tax                 349,876           368,999
   Pro forma income tax                           129,102           138,781
                                           --------------   ---------------
Adjusted net income                        $      220,774   $       230,218
                                           ==============   ===============

Diluted weighted average shares
 outstanding                                      134,102           133,289

Adjusted diluted earnings per share        $         1.65   $          1.73
                                           ==============   ===============
Selected Product Review

Lidoderm®. For the three months ended December 31, 2006, net sales of Lidoderm® were $173.5 million compared with $130.5 million in the fourth quarter of 2005. For the 12 months of 2006, net sales of Lidoderm® were $566.8 million, up from $419.4 million in the same period a year ago. In the fourth quarter of 2006, prescription growth for Lidoderm® was up 19% and dispensed unit growth was up 22% from the comparable 2005 period. For the 12 months ended December 31, 2006, prescription growth for Lidoderm® was up 21% and dispensed unit growth was up 24% from the comparable 2005 period. Endo estimates that prescription demand for Lidoderm® was approximately $170 million and $589 million in the fourth quarter and full-year of 2006, respectively.

Percocet®. Net sales of Percocet® were $27.8 million for the three months ended December 31, 2006 compared with $29.7 million in the same period in 2005. Net sales of Percocet® were $102.7 million for the 12 months ended December 31, 2006 compared with $110.7 million in the same period in 2005. The company estimates that prescription demand for Percocet® was approximately $28 million and $105 million in the fourth quarter and full-year of 2006, respectively. Net sales of Percocet continue to be adversely affected by generic competition.

Frova®. Net sales of Frova® were $11.5 million for the three months ended December 31, 2006 compared with $13.0 million in the same period in 2005. Net sales of Frova® were $40.6 million for the 12 months ended December 31, 2005 compared with $38.1 million in 2005. The company estimates that prescription demand for Frova® was approximately $13 million and $46 million in the fourth quarter and full-year 2006, respectively.

Opana® ER and Opana®. Combined net sales for these two products, representing end-user demand, were $6.8 million for the fourth quarter of 2006. Although commercial shipments totaling $20.6 million of Opana® ER and Opana® to customers were made in 2006, it was determined that it was not appropriate to recognize revenue for these shipments at this time under accounting principles generally accepted in the United States. The approximately $13.8 million balance of the deferred revenue is expected to be recorded as net sales in future periods.

Other branded products. Combined sales of all other branded products were $3.2 million for the three months ended December 31, 2006 compared with $3.9 million in the same period in 2005. Combined sales of all other branded products were $14.0 million for the 12 months ended December 31, 2006 versus $15.0 million in the comparable period in 2005.

Oxycodone extended-release. In June 2005, the company began commercial sale of all four strengths of its extended-release oxycodone tablets, the generic equivalent of Purdue Pharma's OxyContin®. Net sales of extended-release oxycodone tablets were $13.8 million in the fourth quarter of 2006 and $57.1 million for the full-year ended December 31, 2006 compared with $35.5 million and $114.0 million for the comparable periods of 2005, when Endo benefited from six months of marketing semi-exclusivity.

As announced on August 28, 2006, Endo reached an agreement with The Purdue Frederick Company to settle the long-running litigation in which Purdue claimed that Endo's oxycodone extended-release tablets, 10mg, 20mg, 40mg, and 80mg, a bioequivalent version of Purdue Frederick's OxyContin®, infringe Purdue's U.S. Patent Nos. 5,549,912, 5,508,042 and 5,656,295. Pursuant to the settlement, Endo continued selling to its customers its oxycodone extended-release products through December 31, 2006. As part of the settlement, Endo, as well as its manufacturers, distributors, purchasers, and patients, were released from all liability for infringement of Purdue's patents in connection with Endo's sales of these products.

Other generic products. For the fourth quarter, net sales of other generic products were $22.9 million in 2006 compared with $28.1 million in 2005. For the full year, net sales of other generic products were $121.7 million in 2006 versus $123.0 million in 2005. The quarterly and year-to-date decrease in 2006 is due to increased generic competition with the company's morphine sulfate extended-release tablets. Endo expects this additional competition to continue to adversely affect its market share and the price of both Endocet® and its morphine sulfate extended-release tablets.

Note to Investors

Endo will conduct a conference call with financial analysts to discuss this news release today at 11:00 a.m. ET. Investors and other interested parties may access the conference call by dialing (866) 362-5158 (domestic) or (617) 597-5397 (international). Please dial in 10 minutes prior to the scheduled start time and reference conference code 35562806.

A replay of the call will be available from February 22 at 1:00 p.m. ET by dialing (888) 286-8010 (domestic) or (617) 801-6888 (international), passcode 87058859, and will run until 12:00 a.m. ET on March 1, 2007.A simultaneous webcast of the call for interested investors and others may be accessed by visiting www.endo.com. In addition, a replay of the webcast will be available until 12:00 a.m. ET on March 1, 2007. The replay can be accessed by clicking on "Events" in the Investor Relations section of the website.

About Endo

Endo Pharmaceuticals Holdings Inc. is a fully integrated specialty pharmaceutical company with market leadership in pain management products. Through its wholly owned Endo Pharmaceuticals Inc. subsidiary, the company researches, develops, produces and markets a broad product offering of both branded and generic pharmaceuticals, meeting the needs of healthcare professionals and consumers alike. More information, including this and past press releases of Endo Pharmaceuticals Holdings Inc., is available online at www.endo.com.

Forward-Looking Statements

This press release contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates and projections. Statements that are not historical facts, including statements which are preceded by, followed by, or that include, the words "believes," "anticipates," "plans," "expects" or similar expressions and statements are forward-looking statements. Endo's estimated or anticipated future results, product performance or other non-historical facts are forward-looking and reflect Endo's current perspective on existing trends and information. Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are subject to risks and uncertainties and, therefore, actual results may differ materially from those expressed or implied by these forward-looking statements. The reader should not rely on any forward-looking statement. The Company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Several important factors, in addition to the specific factors discussed in connection with these forward-looking statements individually, could affect the future results of Endo and could cause those results to differ materially from those expressed in the forward-looking statements contained in this press release. Important factors that may affect future results include, but are not limited to: market acceptance of the Company's products and the impact of competitive products and pricing; dependence on sole source suppliers; the success of the Company's product development activities and the timeliness with which regulatory authorizations and product launches may be achieved; successful compliance with extensive, costly, complex and evolving governmental regulations and restrictions; the availability on commercially reasonable terms of raw materials and other third party manufactured products; exposure to product liability and other lawsuits and contingencies; dependence on third party suppliers, distributors and collaboration partners; the ability to timely and cost effectively integrate acquisitions; uncertainty associated with pre-clinical studies and clinical trials and regulatory approval; uncertainty of market acceptance of new products; the difficulty of predicting FDA approvals; risks with respect to technology and product development; the effect of competing products and prices; uncertainties regarding intellectual property protection; uncertainties as to the outcome of litigation; changes in operating results; impact of competitive products and pricing; product development; changes in laws and regulations; customer demand; possible future litigation; availability of future financing and reimbursement policies of government and private health insurers and others; and other risks and uncertainties detailed in Endo's filings with the Securities and Exchange Commission, including its Registration Statement on Form S-3 filed with the SEC on March 21, 2006. Readers should evaluate any statement in light of these important factors.

(Tables Attached)

The following tables present Endo's unaudited net sales for the three months and twelve months ended December 31, 2006 and December 31, 2005:


                         Endo Pharmaceuticals Holdings Inc.
                               Net Sales (unaudited)
                                   (in thousands)


                                                       Three Months Ended
                                                          December 31,
                                                          ------------

                                                      2006           2005
                                                      ----           ----

    Lidoderm®                                       $173,501       $130,517
    Percocet®                                         27,806         29,745
    Frova®                                            11,456         13,010
    Opana ER® and Opana®                               6,845              -
    DepoDur®                                             847            935
    Other Brands                                       2,342          2,956
                                                       -----          -----
    Total Brands                                    $222,797       $177,163

    Oxycodone ER                                     $13,812        $35,484
    Other Generics                                    22,862         28,142
                                                      ------         ------
    Total Generics                                   $36,674        $63,626
                                                     -------        -------
        Total Net Sales                             $259,471       $240,789
                                                    ========       ========



                         Endo Pharmaceuticals Holdings Inc.
                               Net Sales (unaudited)
                                   (in thousands)


                                                          Year Ended
                                                          December 31,
                                                          ------------

                                                      2006           2005
                                                      ----           ----

    Lidoderm®                                    $566,785          $419,418
    Percocet®                                     102,707           110,700
    Frova®                                         40,564            38,096
    Opana ER® and Opana®                            6,845                 -
    DepoDur®                                        2,993             3,931
    Other Brands                                   11,034            11,098
                                                   ------            ------
    Total Brands                                 $730,928          $583,243

    Oxycodone ER                                  $57,075          $113,969
    Other Generics                                121,656           122,952
                                                  -------           -------
    Total Generics                               $178,731          $236,921
                                                 --------          --------
        Total Net Sales                          $909,659          $820,164
                                                 ========          ========
The following table presents Endo's consolidated statements of operations for the three months and year ended December 31, 2006 and December 31, 2005:

                         Endo Pharmaceuticals Holdings Inc.
                Consolidated Statements of Operations (unaudited)
                       (in thousands, except per share data)


                                    Three Months Ended      Year Ended
                                        December 31,        December 31,
                                       2006      2005      2006      2005
                                    --------- --------- --------- ---------

 NET SALES                          $ 259,471 $ 240,789 $ 909,659 $ 820,164
 COST OF SALES                         57,870    53,108   201,421   186,350
                                    --------- --------- --------- ---------
 GROSS PROFIT                         201,601   187,681   708,238   633,814
 COSTS AND EXPENSES:
  Selling, general and
   administrative                      87,813    54,262   340,094   211,246
  Research and development             23,426    18,187    82,808    88,307
  Depreciation and amortization         4,554     4,059    17,498    15,497
  Impairment of other intangible
   asset                               31,263         -    31,263     5,515
  Purchased in-process research and
   development                         26,046         -    26,046         -
                                    --------- --------- --------- ---------
 OPERATING INCOME                      28,499   111,173   210,529   313,249
 INTEREST INCOME, Net                   6,133     4,338    23,205    10,995
                                    --------- --------- --------- ---------
 INCOME BEFORE INCOME TAX              34,632   115,511   233,734   324,244
 INCOME TAX                            19,858    42,630    95,895   121,949
                                    --------- --------- --------- ---------
 NET INCOME                         $  14,774 $  72,881 $ 137,839 $ 202,295
                                    ========= ========= ========= =========

 NET INCOME PER SHARE:

 Basic                              $    0.11 $    0.55 $    1.03 $    1.53
 Diluted                            $    0.11 $    0.54 $    1.03 $    1.52

 WEIGHTED AVERAGE SHARES:

 Basic                                133,505   132,736   133,178   132,242
 Diluted                              134,136   133,744   133,911   133,289
The following table presents the Endo's unaudited condensed consolidated balance sheet data at December 31, 2006 and December 31, 2005:

                         Endo Pharmaceuticals Holdings Inc.
                Condensed Consolidated Balance Sheet Data (unaudited)
                                   (in thousands)


                                            December 31,     December 31,
                                                2006             2005
                                           ---------------  ---------------
ASSETS
   Cash and cash equivalents               $       628,085  $       500,956
   Accounts receivable, net                        279,159          290,826
   Inventory                                        55,932           50,983
   Income taxes receivable                               -           66,461
   Other current assets                             66,641           84,159
                                           ---------------  ---------------
      Total current assets                       1,029,817          993,385
 Property and equipment, net                        36,565           38,001
 Goodwill                                          181,079          181,079
 Other intangibles, net                             78,046           99,065
 Note receivable                                    52,872           48,925
 Other assets                                       12,113           11,223
                                           ---------------  ---------------
 TOTAL ASSETS                              $     1,390,492  $     1,371,678
                                           ===============  ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
 Due to Endo Pharma LLC                    $        38,693  $       200,450
 Other current liabilities                         293,209          309,063
                                           ---------------  ---------------
      Total current liabilities                    331,902          509,513
 Other liabilities                                  17,602           18,795

 Total stockholders' equity                      1,040,988          843,370
                                           ---------------  ---------------

 TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                   $     1,390,492  $     1,371,678
                                           ===============  ===============
The following table presents condensed consolidated cash flow data for the year ended December 31, 2006 and December 31, 2005:

                         Endo Pharmaceuticals Holdings Inc.
                   Condensed Consolidated Cash Flow Data (unaudited)
                                   (in thousands)


                                                     Year Ended
                                                     December 31,
                                           -------------------------------
                                                2006             2005
                                           --------------   --------------

Net cash provided by operating activities  $      345,334   $      284,644
Net cash used in investing activities             (66,449)         (26,684)
Net cash used in financing activities            (151,756)         (35,038)
                                           --------------   --------------
Net increase in cash and cash equivalents  $      127,129   $      222,922

Cash and cash equivalents, beginning of
 period                                    $      500,956   $      278,034
                                           --------------   --------------
Cash and cash equivalents, end of period   $      628,085   $      500,956
                                           ==============   ==============
Net Cash Used in Financing Activities

During the years ended December 31, 2006 and December 31, 2005, net cash used in financing activities includes a $195.8 million and a $42.8 million payment, respectively, to Endo Pharma LLC, a limited liability company that previously held a significant portion of Endo common stock, in which affiliates of Kelso & Company and certain current and former members of management have an interest. This payment was made pursuant to the tax-sharing agreement between the company and Endo Pharma LLC, which requires the company, under certain circumstances, to pay Endo Pharma LLC the amount of the tax benefits that are usable by the company as a result of the exercise of stock options granted pursuant to the Endo Pharma LLC Stock Option Plans, which stock options are exercisable only into shares of Endo common stock held by Endo Pharma LLC and, accordingly, do not dilute the ownership of the company's public stockholders. The company has recorded a liability of $38.7 million as of December 31, 2006 related to compensation deductions expected to be taken in 2006, which if used to reduce our 2006 income taxes will be paid to Endo Pharma LLC in 2007.