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Edited Transcript of ENDP earnings conference call or presentation 5-Nov-19 12:30pm GMT

Q3 2019 Endo International PLC Earnings Call

DUBLIN Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Endo International PLC earnings conference call or presentation Tuesday, November 5, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blaise Coleman

Endo International plc - Executive VP & CFO

* Domenic Ciarico

Endo International plc - Executive VP of Sterile & Chief Commercial Officer of Generics

* Laure E. Park

Endo International plc - SVP of IR & Corporate Affairs

* Patrick A. Barry

Endo International plc - Executive VP & Chief Commercial Officer

* Paul V. Campanelli

Endo International plc - Chairman, President & CEO

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Conference Call Participants

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* Annabel Eva Samimy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Christopher Thomas Schott

JP Morgan Chase & Co, Research Division - Senior Analyst

* Dana Carver Flanders

Guggenheim Securities, LLC, Research Division - Senior Analyst

* David A. Amsellem

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Gregory B. Gilbert

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Kevin Kedra

Morgan Group Holding Co. - Research Analyst

* Randall S. Stanicky

RBC Capital Markets, Research Division - MD of Global Equity Research and Lead Analyst

* Xiaozhou Fan

SVB Leerink LLC, Research Division - Associate

* Yih-Jiunn Chiu

Morgan Stanley, Research Division - VP and Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Endo International plc Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Laure Park, Senior Vice President, Investor Relations and Corporate Affairs. You may begin.

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Laure E. Park, Endo International plc - SVP of IR & Corporate Affairs [2]

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Good morning, and thank you for joining us to discuss our third quarter 2019 financial results. Joining me on today's call are Paul Campanelli, Chairman, President and CEO of Endo; Blaise Coleman, Executive Vice President and CFO; Pat Barry, Executive Vice President and Chief Commercial Officer of our Branded business; and Domenic Ciarico, Executive Vice President and Chief Commercial Officer of our Sterile and Generics business. We have prepared a slide presentation to accompany today's webcast and that presentation, as well as other materials, are posted online in the investor section at endo.com.

I'd like to remind you that any forward-looking statements made by management are covered under the U.S. Private Securities Litigation Reform Act of 1995 and the applicable Canadian securities laws and are subject to the changes, risks and uncertainties described in yesterday's press release in our U.S. and Canadian securities filings. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's current report on Form 8-K furnished with the SEC yesterday for Endo's reasons for including those non-GAAP financial measures in yesterday's earnings release and today's presentation. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our earnings press release issued yesterday unless otherwise noted. I would now like turn the call over to Paul.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [3]

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Thank you, Laure. Good morning, and thank you for joining us for today's call. I hope you've had a chance to review the company's announcements from last evening. As announced yesterday, I notified the Board of my intention to retire as President and Chief Executive Officer of Endo as soon as a successor is named, and accordingly the Board has implemented its CEO succession plan. Additionally, I am honored to become the Chairman of the Board and Roger Kimmel has been appointed Senior Independent Director. I will continue as President and CEO until my successor is appointed, and will then continue to serve as the Chairman of the Board following the appointment of Endo's next CEO. Along with the entire Board, I would like to thank Roger Kimmel for his service as Chairman and his ongoing service to the company. Over the last 3 years, we've been laser-focused on executing our strategy to simplify our business, drive productivity improvements, and leverage our culture as a differentiator, which has led to strong operating performance despite a challenging external environment. Building from this position of strength, now is the time to transition to new leadership who will look to build on the momentum. I am proud of what the Endo team has accomplished, and I am confident that we have positioned the company for long-term growth and success. I am thrilled to remain a part of Endo for its next chapter.

Now let's turn our attention to the third quarter 2019 earnings presentation.

Beginning on Slide 2, here is a brief agenda for today's call.

Moving to Slide 3. I am pleased to report that Endo's third quarter financial results further demonstrate the continued execution of our multiyear strategic plan. Led by XIAFLEX and VASOSTRICT, third quarter revenues for both the Specialty Products portfolio of our Branded Pharmaceuticals segment and the Sterile Injectables segment continued their year-over-year double-digit growth momentum. We reported third quarter 2019 total enterprise revenues of $729 million and adjusted EBITDA of $321 million, which were both in line with our expectations. We are updating full year 2019 guidance, narrowing the expected ranges for revenue, adjusted diluted net income per share from continuing operations and adjusted EBITDA. Blaise will walk you through our financial performance later in our presentation.

Additionally, we are pleased that during the third quarter, we settled with Cuyahoga and Summit counties in the Track 1 multidistrict opioid litigation for a total of $10 million in cash and up to $1 million of free product. We continue to be open to identifying and executing on a constructed path forward to resolve the pending opioid litigation, but there can be no assurances that resolution will be achieved. And it is important to note that while settlement remains our goal, we are prepared to litigate if necessary. I understand that there are many questions on this topic. However, as I'm sure you can appreciate, we are limited to what we can say and I have no additional comments to add at this time.

Moving to Slide 4. You will see a snapshot of our segment revenues and our consolidated adjusted EBITDA for the third quarter.

Now moving to Slide 5. The Specialty Products portfolio of our Branded Pharmaceutical segment continue to advance in the third quarter with year-over-year revenue growth of 18%. This performance was driven by strong execution across all products within our Specialty Products portfolio. Our XIAFLEX franchise had another outstanding quarter of growth. The franchise saw an acceleration in revenue growth of 29% compared to the third quarter of 2018, and 11% compared to the second quarter of 2019. This accelerated growth reflects continued strong underlying demand in both the Peyronie's disease, in Dupuytren's contracture indications due to the investment and outstanding promotional executions behind XIAFLEX. Additionally, we are pleased with the third quarter performance of other specialty products where year-over-year revenue growth was primarily driven by volume. Offsetting the Specialty Products portfolio, third quarter revenue growth is the year-over-year revenue decline in our Established Products portfolio, which was primarily due to Generic competition and resulted in a 1% year-over-year decline in our total Branded Pharmaceuticals segment revenue. As part of our mission, we feel a deep responsibility to help raise awareness of the under-treated disease states supported by XIAFLEX amongst patients, caregivers, and health care professionals to help drive improved treatment rates for patients suffering from those conditions. In this context, we are excited to have engaged Pro Football Hall of Fame quarterback, John Elway, as the spokesperson for our Facts On Hand disease awareness campaign focused on educating the public about Dupuytren's contracture and encouraging patients to reach out to a hand specialist. The early results of the national TV and online campaign have been impressive. Visits to the unbranded Facts On Hand website tripled with a high conversion to our branded XIAFLEX website in searches for a physician on the website physician locator. This helps to convert seekers into XIAFLEX patients.

I'm proud of the commercial capabilities that we've built across our Specialty business. These capabilities that are driving growth today are the same ones we plan to leverage for our potential CCH for cellulite product as well as other opportunities. Based on the continued strong underlying growth in our Specialty Products portfolio, we have updated our full year 2019 guidance and now expect Specialty Products revenue growth to be in the midteens percentage range, and XIAFLEX revenue growth to be approximately 20%.

Now moving to our potential CCH for the treatment of cellulite products. In September, we submitted a BLA to the FDA. We are continuing to take what we believe are the appropriate steps across our organization to prepare for regulatory approval in the second half of 2020. Additionally, 2 weeks ago, at the American Society for Dermatologic Surgery annual meeting held in Chicago, we presented data on the use of a standing MRI for the evaluation of cellulite. And we launched our new Endo Aesthetics website designed to appropriately engage with the physician community.

Turning to Slide 6. Our Sterile Injectables segment continues to deliver with revenue growth of 11% in the third quarter of 2019 compared to the third quarter of 2018. This performance was driven by continued strong growth in VASOSTRICT and ADRENALIN as well as APLISOL. VASOSTRICT revenues were $130 million, a 15% increase compared to the same period in 2018. ADRENALIN revenues were $40 million in the quarter, up 14% compared to last year. APLISOL revenues were approximately $28 million compared to $16 million in the same period in 2018, driven by wholesaler's restocking, following a temporary supply shortage. We anticipate significantly lower APLISOL revenues in the fourth quarter, driven by the nonrecurrence of the third quarter restocking benefit and anticipated wholesaler de-stocking. Looking forward, we reaffirm our guidance of 2019 Sterile Injectables revenue growth in the high-single to low double-digit percentage range with VASOSTRICT revenues expected to grow by a low double-digit percentage.

Turning to our Generic Pharmaceutical segment on Slide 7. The decrease in revenues for this segment during the third quarter compared to the same period last year primarily reflects the impact of anticipated competitive pressures on certain generic products. This decrease was partially offset by the benefit of certain product launches, including colchicine tablets, the authorized generic of Colcrys, a Paragraph IV settlement.

On the generic market landscape, as we've noted before, the environment remains active and dynamic reflecting a high level of competition, which is primarily driven by new market entrants. We are reaffirming our guidance for full year 2019 Generic Pharmaceutical revenues to decline in the mid- to high-teens percentage range.

Moving to Slide 8. Our International Pharmaceuticals segment benefited this quarter from delayed generic competition, which we expect to materialize in the near term. For the full year 2019, we reaffirm our guidance of International Pharmaceuticals revenue declines of approximately 20% compared to full year 2018.

Turning to Slide 9. We shift focus to a diverse pipeline. As referenced earlier, we submitted our BLA to the FDA for our CCH for cellulite products. As part of our data generation plan, we have several real-world CCH studies in development, focused on dosing, injection technique and responses in target patient populations as well as rollover studies on durability. Additionally, we remain on track to launch approximately 15 new products in 2019 across our Sterile Injectables, Generic Pharmaceuticals and International Pharmaceutical segments, and have launched 11 products year-to-date, including 4 in the third quarter. Third quarter launches included treprostinil injection indicated for the treatment of pulmonary arterial hypertension and the first generic Orfadin in the U.S. We take pride in offering our customers lower-cost generic alternatives. Our Sterile Injectables pipeline is supplemented by our strategic relationships with third parties such as Nevakar, which will potentially provide 5 differentiated 505(b)(2) hospital and critical care-based products. We continue to expect the first launch from our Nevakar agreement in late 2020. The table on the bottom of Slide 9 shows some of our key disclosed, future first-to-file or first-to-market opportunities.

Now let me turn the call over to Blaise to further discuss the company's third quarter financial performance and full year 2019 financial guidance. Blaise?

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Blaise Coleman, Endo International plc - Executive VP & CFO [4]

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Thank you, Paul, and good morning, everyone. First, on Slide 10, you'll see a snapshot of the third quarter GAAP and non-GAAP financial results. Paul covered company and segment revenues earlier, so I will not read that again. On a GAAP basis, we had a diluted net loss per share from continuing operations of $0.18 in the quarter compared to a loss of $0.65 per share in the third quarter of 2018. GAAP loss from continuing operations in the third quarter 2019 was $41 million compared to a GAAP loss from continuing operations of $146 million during the same period in 2018. On an adjusted basis, third quarter adjusted income from continuing operations of $138 million was lower than the previous year, which is mainly due to a lower adjusted gross margin and an increase in our adjusted effective tax rate. The lower adjusted gross margin was primarily due to a decline in revenue and an unfavorable change in product mix in our Generic Pharmaceutical segment. The lower adjusted effective tax rate is primarily driven by an unfavorable change in adjusted pretax income jurisdictional mix. Adjusted diluted net income per share from continuing operations in third quarter of 2019 was $0.60 compared to $0.71 in third quarter 2018.

Slide 11 provides a summary of Endo's updated 2019 full year financial guidance. We are narrowing our financial guidance ranges for the year for revenue, adjusted diluted income per share from continuing operations and adjusted EBITDA and have updated the underlying financial guidance assumptions. These assumptions are presented at the bottom of Slide 11 and include our expectation for fourth quarter adjusted gross margin as a percentage of sales to be in line with third quarter 2019. And for fourth quarter adjusted operating expenses to increase slightly compared to the third quarter 2019.

Moving to Slide 12. This is a summary of the segment and product-specific guidance previously discussed.

Advancing to slide 13 and wrapping up the financial discussion. For the first 9 months of 2019, we had an unrestricted cash flow prior to debt payment of $421 million. And we have ended the third quarter of 2019 with approximately $1.5 billion of unrestricted cash and a net debt to adjusted EBITDA leverage ratio of approximately 5.3x. We're updating our 2019 guidance for expected unrestricted cash flow prior to debt payment to be in the range of approximately $280 million to $320 million compared to unrestricted cash flow prior to debt payment of $100 million to $200 million previously. And this change reflects the impact of the shift in the estimated timing of cash distributions to settle mesh claims from 2019 to 2020. Now let me turn it back over to Paul. Paul?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [5]

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Thank you, Blaise. Finally, moving to Slide 14. In concluding today's presentation, despite circumstances that could easily distract us, we remain focused on executing against our multiyear strategic plan. We believe that enhancing our capabilities in Sterile Injectables and our Branded Specialty Products portfolio, including Medical Aesthetics and strengthening our Generics business position Endo well for the future. I am grateful to all of our team members for their commitment and hard work. Let me now turn the call back over to Laure to manage our question-and-answer period. Laure?

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Laure E. Park, Endo International plc - SVP of IR & Corporate Affairs [6]

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Thank you, Paul. (Operator Instructions) Beatrice, may we have the first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Randall Stanicky with RBC Capital Markets.

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Randall S. Stanicky, RBC Capital Markets, Research Division - MD of Global Equity Research and Lead Analyst [2]

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Paul, you caught a lot of a soft guard last night, especially given the extension of your contract in April. So let me ask what I think a bunch of people are thinking. Why announce this now? I mean the stock is depressed. It's a critical time given the opioid litigation, the defense of VASOSTRICT and pending launch of CCH. I know you don't want to comment on the opioid litigation but the read for some is going to be that near term resolution's unlikely. So that's number 1, if you could just expand on your thinking there.

And then secondly, it seems to me that the biggest opportunity for Endo, given some of the balance sheet constraints is to leverage the commercial footprint, more by way of aggressive business development, more deals like Nevakar but maybe with a bigger focus on the brand side. What's the rate-limiting factor there as to why we haven't seen more? And is that something that you intend to put greater emphasis on in your new role? I mean I guess the question is, can we expect more active business development out of Endo in 2020 with you in a Chairman role with more time to spend on that?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [3]

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Yes. Thanks, Randall. The first question with respect to, really, the timing. Ultimately, I looked at 2 ways in terms of it's a balance of a personal life decision and at the same time, looking at the strength of the company, where I believe it is, and looking at what we've achieved and where we're headed and things in which we control. There's no doubt that we all know what our challenges are with respect to liabilities. But when I take a step back and I look at what this leadership team has done over the last year, I truly believe that we are in the best position for growth. And looking at what we've done both on the Specialty side and the Sterile side, I think we're just positioned very, very well.

With respect to some of the open items, those things will continue with respect to VASOSTRICT, et cetera. I'm still here at the end of the day. I am still the President and CEO. I would anticipate being able to participate in some of the unfinished business. But at the end of the day, it's a balance between my family and also knowing as I look around this table here and looking at leadership within Endo that we have a lot of talent and a lot of strengths to take us to the next level. So I actually feel very, very comfortable. Frankly, my family is quite excited for me as I am.

Regarding the business development question. I don't think anything has really changed in that regard. In terms of deals like Nevakar, that was an opportunistic deal that we are incredibly excited about. Clearly, there is a focus on the Specialty side. If there is a product opportunity that could fit in with either our orthopedic or men's health on urology side, there's nothing stopping us from looking at appropriately sized deals for product acquisitions. So that's something that the business development team continues to evaluate. And frankly, we also have a [bullpen] looking at future success. We're not moving forward at this point in time with adding additional Medical Aesthetics, but there's a bullpen ready to go if and when we have a launch with CCH. I'm confident in our ability to have success. Once -- if and when we get approved, but there is a database of targets in Medical Aesthetics. And there's nothing stopping us to bring in small, appropriate-sized deals on the Specialty and Sterile Injectables side for that matter.

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Operator [4]

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And our next question comes from Greg Gilbert with SunTrust.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [5]

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Congrats, Paul. I know -- we're going to miss you. I know you're not going anywhere but thanks for everything. I suspect you all are standing around the fax machine. Do you have any news on the BLA?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [6]

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Well, that's a direct question. Well, first of all, Greg, thank you for the kind words there. With respect to news on the BLA, no, we don't have any direct news. I think we were candid with respect to -- everybody knows the file date of the BLA, which was September 6. We've noted there was a 60-day period. I believe that is tomorrow. So I think at this point in time, no news at this point is viewed as good news. We've had limited interactions, and I would say at this point in time, we've seen no surprises. And I would say, it's normal course in what our expectations are. So a little bit more time is required.

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Gregory B. Gilbert, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [7]

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Great. Well, let me ask my real questions now. On VASOSTRICT, good growth in the quarter and you're expecting continued growth. Is that growth tied mostly to the compounded product or what little of it was out there coming off the market? Or are there other drivers of revenue growth for the product that could be more durable? And how did the hearing go and shape your confidence on the legal going forward? And then question 2 is just about the XIAFLEX growth outlook for Peyronie's versus Dupuytren's, not looking for specific guidance but maybe you can speak to the runway you're seeing for the growth of the one indication versus the other.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [8]

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Okay. Great. So I'll start off and then I'm going to pass it over to Domenic on the VASOSTRICT side, and I'll pass it to Pat on the XIAFLEX side.

So I think the first thing, so in terms of the growth with respect to the compounded product, I think we've seen some small benefits with respect to that opportunity. I think also there is very, very small volume growth also in VASOSTRICT. So I think it's a combination. Keep in mind, it's a large product so very small volume growth is also helping us with respect to the healthy revenue side. I'm going to pass it over to Domenic in case you'd like to add a little more color.

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Domenic Ciarico, Endo International plc - Executive VP of Sterile & Chief Commercial Officer of Generics [9]

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No, Paul. I agree with that assessment. I do think that we're still seeing some of the return of the compounded product so that's a small amount.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [10]

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Yes. So at the end of the day, Greg, I think it's -- to Domenic's point, it's really -- at this point in time, it's probably more tied to small volume growth. With respect to Peyronie's, Pat, would you like to comment?

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Patrick A. Barry, Endo International plc - Executive VP & Chief Commercial Officer [11]

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Yes. Sure. I mean, Paul, you mentioned in your comments that we've experienced 29% net sales growth. What we're excited about is that net sales growth is really fueled by very strong underlying demand growth. And so we saw about a 21% demand growth, and we want to continue to see both indications growing. And so Peyronie's is growing at 24% and Dupuytren's is growing at 15%. So that's exactly what we want to see healthy growth across both indications. And in terms of the runway, Paul mentioned in his comments that we're projecting growth at the 20 percentile with XIAFLEX. Again, that's going to continue to be fueled with underlying demand growth. We're not guiding, obviously, beyond 2019, but as we look at sustainable growth, we get excited about the opportunity that is XIAFLEX. When you look at the medical literature, up -- about 15 million Americans aged 35 and older have Dupuytren's contracture. Almost -- many of those -- most of those go undiagnosed and of the 13% of men, we believe based on the literature, suggest that have Peyronie's disease. So with such low diagnosis rates and treatment rates, we feel like we have sustainable growth opportunities for both indications.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [12]

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And Greg, I think your last question was going back to the VASOSTRICT Paragraph IV litigation. And as you -- and as I'm sure you can understand that, it is active litigation at this point in time. We just cannot comment on the status of litigation. So more to follow, but we don't comment on an active litigation. So we can go to the next question.

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Operator [13]

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And our next question comes from Gary Nachman with BMO Capital Markets.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [14]

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First, what additional prelaunch activities have you been doing to prepare for CCH for cellulite? When will you start hiring those reps and how many will you have? And then how should we think about gross margins trending over time? Will it hover in the mid-60s range? What are the pushes and pulls on that front going forward?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [15]

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So with respect to prelaunch activities, we are very excited about our ability to attract strong talent. We're active on the marketing side, more to follow on the sales rep. And Pat is going to add additional color on how we're looking at it.

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Patrick A. Barry, Endo International plc - Executive VP & Chief Commercial Officer [16]

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Yes. No. Thanks for the question. We've been really busy. If you've talk to key opinion leaders and -- who have been at the medical meetings, we've been very active establishing Endo as a new innovator and a future leader. We will -- you can expect that we would continue to elevate the importance of cellulite to our HCPs and consumers. We will continue to highlight our R&D activities. We've got strong phase IIb and Phase III data. And we've got an aggressive data generation plan, which we think will continue to build anticipation for potentially the first approved injectable for the treatment of cellulite. We've hired credential Medical Aesthetics folks already. We've built out our marketing team, and we'll continue to add some strategic positions. We just recently hired 2 area sales directors that are helping us refine our footprint. We're not going to get into the specific guidance of the size of our footprint, but I think you can expect that, obviously, we would have a specialty-focused footprint that would allow us to reach those core dedicated Medical Aesthetic positions. So again, within that OpEx profile, that fits strategically nicely within our current vision of being a focused branded specialty organization.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [17]

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And I'll pass it over to Blaise with respect to some of the pushes and pulls on the gross margin side.

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Blaise Coleman, Endo International plc - Executive VP & CFO [18]

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Yes. Gary, we're not going to be providing any forward-looking shaping as it relates to gross margin. What we would say in terms of pushes and pulls, is these things that you would expect which would be product mix, competitive landscape assumptions, our COGS profile over time as well as drug pricing. This will be the probably the 4 main factors that we'd be thinking about as we think about our gross margin shaping going forward.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [19]

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Okay. Just one follow-up. Would you plan to do anything substantial with your facilities to help improve COGS? Is that part of the strategy?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [20]

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Well, we're always looking at ways to improve our gross margins, Gary. At the end of the day, in ways which -- I wouldn't really refer to that as normal course, right? So as our portfolio reshapes, we really look at our portfolio footprint in that light. So that's really normal course. That's always ongoing. That's just part of our DNA.

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Operator [21]

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And our next question comes from Annabel Samimy with Stifel.

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Annabel Eva Samimy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [22]

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Just back on CCH. When the FDA finally accepts the application, are they going to indicate that this is generally a separate BLA from XIAFLEX? Or is it pretty established at this point that CCH is considered a completely different product from XIAFLEX?

And then separately, just looking at SG&A and R&D, there seem to have been a tick up in those 2 expenses and fiscal year guide looks like it'll come back down. Could you just help us understand some of the pushes and pulls there for the quarter? Is it related specifically to preparing for the XIAFLEX launch or is there anything else going on there?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [23]

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Yes. Again, Annabel, with respect to the application, as we said that we submitted the BLA. We believe in our position, we're confident in it. But until we receive a BLA, we're just going to have to be silent on that. As soon as we understand from the FDA, we will communicate that we've received the BLA. Again, we're confident in our position but we can't definitively say one way or the other. I'll pass the call over to Blaise with respect to the financial question.

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Blaise Coleman, Endo International plc - Executive VP & CFO [24]

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Sure. So Annabel, just in terms of your question on operating expenses. We did see an increase sequentially from Q2 to Q3. And really related to our R&D spend, and that really just had to do with the phasing of project spend. So nothing unusual there and there was also a small increase in G&A cost. In terms of our guidance for Q4, in the script, we noted that we expect to see a slight increase in Q4 spend opposite of Q3, and that's really normal course. And the aspect of that is us planning for success commercially both on the CCH cellulite product, but also as we continue to invest in XIAFLEX growth.

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Operator [25]

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And our next question comes from Chris Schott with JPMorgan.

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Christopher Thomas Schott, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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I guess the first one's just on the cellulite opportunity and following up on Gary's question, should we be thinking about a meaningful step-up in SG&A associated with this launch or can you pull resources from elsewhere in the organization to support the opportunity? Not asking for specific numbers but more just directionally so we're prepared for thinking about whatever spend might be associated there.

And my second question was on the generic Colcrys opportunity. I know this has become a large product for you. How are you thinking about the durability of the current environment for the product and just the competitive landscape over time?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [27]

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Yes. Sure, Chris. I'll start out. On the cellulite opportunity, I'm going to pass this over to Pat here in a second. But I think as we've mentioned on several of the calls that what we're excited about is that we have quite a bit of infrastructure supporting our specialty side that's established, so from that standpoint, we're certainly going to leverage what we have in-house. As Pat indicated already, we're going to be recruiting for a sales force. We haven't disclosed the specific numbers. But we have a very talented team specifically in-house on the marketing side. But Pat, why don't you add a little color?

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Patrick A. Barry, Endo International plc - Executive VP & Chief Commercial Officer [28]

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Yes. I think that's right, Paul. I mean obviously, Chris, this would be a separate sales force footprint, unique call point, dedicated marketing team, but what we've been working on over the course of the last 3 years is to really to have an infrastructure that's scalable on the specialty side. And so when you think about the backroom support of sales operations, marketing operations, our ability to be able to master the distribution networks, our ability to already -- to infuse an already capable direct-to-consumer capability. Those are things that we would leverage, and that was intentional. We've been building that over the course of the last 3 years. And now what we're doing is we're complementing that with the right Medical Aesthetic expertise. So that we can be ready for launch, and we can maximize the opportunity for cellulite.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [29]

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And then Chris, going back to the Colcrys question in terms of durability. Without going into the specifics of the contract, we are the Authorized Generic. I would tell you from a time standpoint that we have that for several more years. I'd probably leave it at that point here. So from a durability standpoint, several more years.

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Operator [30]

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And our next question comes from Ami Fadia with SVB Leerink.

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Xiaozhou Fan, SVB Leerink LLC, Research Division - Associate [31]

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This is Sheldon on for Ami. We have 2, if we may. The first is about some quarterly fluctuation of your numbers, particularly in ADRENALIN and APLISOL. ADRENALIN number was -- in Q3 was slightly below consensus this quarter. And was there any pricing pressure or some de-stocking behaviors in -- regarding APLISOL? How much was the contribution from distributor restocking? And how should we think about the quarterly run rate?

And our second question is about Noxafil AG. Do you see these products to have comparable revenue potential as the other AGs, injectables you have launched recently like INVANZ?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [32]

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So I'll take a crack at a couple of those questions. Regarding the Authorized Generic, the way you should look at it -- I don't usually go into great detail, but I would say the standard way that you look at Authorized Generics is the way you should be looking at the ertapenem product, right? And I think most people understand what that means. With respect to fluctuation in numbers regarding ADRENALIN, that product is behaving the way we've anticipated, right? You have to keep in mind with respect to the 1 mL, we've had 35% share, and we've had that for a very long time. The 30 mL, we've got 100% share. So I don't think there's any real fluctuation or surprise there. Perhaps what you're referencing, the APLISOL question now, I think we addressed that in the prepared remarks that we had a raw material challenge, we fixed it. We're back in the market and that had to do with some of our comments based upon restocking into the wholesaler, which we don't anticipate happening next quarter. And have I left off anything else? I think that's it. I think I've answered your question.

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Laure E. Park, Endo International plc - SVP of IR & Corporate Affairs [33]

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Treprostinil.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [34]

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Okay. And the question on treprostinil, I didn't -- I might have missed that.

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Laure E. Park, Endo International plc - SVP of IR & Corporate Affairs [35]

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Expectations on...

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [36]

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I'm going to pass it over to Domenic with respect to the expectations on treprostinil. I know it's very early since the approval, but I'll let Domenic.

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Domenic Ciarico, Endo International plc - Executive VP of Sterile & Chief Commercial Officer of Generics [37]

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Sure. Thanks, Paul. Treprostinil injection is a very complex therapy. This product has given us an opportunity to reach further in our customers and build some commercial skills and attributes in our team that's going to help for future launches as well. I will say that it is still early in the process. We have seen pull through on all 4 of the strengths, and we're very confident and optimistic in our commercial strategy.

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Operator [38]

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And our next question comes from Dana Flanders with Guggenheim.

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Dana Carver Flanders, Guggenheim Securities, LLC, Research Division - Senior Analyst [39]

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Maybe just my first one on APLISOL. Blaise, I think you mentioned that there would be some de-stocking in Q4, so should we think about that product declining into Q4 maybe at a run rate below what's normalized for that product? And then just my second one on Nevakar, I know you mentioned a launch upcoming at the end of 2020. As we just think about layering those products into our model, I know your Sterile Injectables margins are very attractive and high. How does Nevakar margins fall relative to the overall business? And should we think about these products as big enough over time to kind of move the margin profile one way or the other?

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Blaise Coleman, Endo International plc - Executive VP & CFO [40]

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Dana, on the APLISOL question, yes, we would expect the run rate to come down. The benefit we saw in Q3 is related to the restocking was somewhere between $10 million to $15 million, just to size that for you.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [41]

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And then Dana, with respect to Nevakar, we're not going to be able to go too deep within to the margin profile. Just keep in mind, this is a collaboration. And with the collaboration, there is a profit split arrangement. So you'll have to take that into consideration. We're not disclosing too much. I would say the lion's share is chipped in the favor of Endo. But I think at this point in time, it's probably as far as we're going to go. And we're confident and excited about the potential launches in late 2020. As we get closer, we'll probably be able to add a little bit more color.

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Operator [42]

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And our next question comes from David Amsellem with Piper Jaffray.

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David A. Amsellem, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [43]

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So on XIAFLEX -- and maybe I missed this, but can you talk about the mix between Peyronie's and DC, and which market, if any, is driving the growth? And also how you're thinking about your current penetration into both populations? That's number 1.

And then secondly on VASOSTRICT and ADRENALIN in particular, I'm trying to get a read on the trajectory of these 2 assets longer term. So with that in mind, where are you in terms of account penetration there? Can you just talk about how should we think about those 2 assets directionally longer term?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [44]

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Sure. Dave, this is Paul. I'll start with VASOSTRICT, and then I'll pass it over to Pat regarding XIAFLEX. In terms of the trajectory of the assets, I think you've got to look at these. These are our long-established assets. I think Domenic's team has done an outstanding job with respect to market penetration. I would say at this point in time, there is 100% conversion in terms of volume. So what you're seeing here is when there's a modest price increase, that's really what -- the way I'm looking at VASOSTRICT and ADRENALIN. As I've indicated earlier before, at this point in time, we've got 100% of the volume regarding the 30 mL, and we've got about 35%, 37% of the volume on the 1 mL. So I think that's been pretty historic. Domenic, anything to add on ADRENALIN?

So that's the way, David, I would look at VASOSTRICT. Regarding the split between Peyronie's and Dupuytren's. Pat?

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Patrick A. Barry, Endo International plc - Executive VP & Chief Commercial Officer [45]

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Yes. Sure. Thanks, Paul. David, just roughly speaking the split between Peyronie's and Dupuytren's is about 60/40. I would also add to that, that both indications are growing, which is great. I mentioned earlier in my comments that the Peyronie's indication is growing at about 24% and Dupuytren's contracture is growing at about 15%. That's the underlying demand that I'm referencing. And then in terms of penetration, when decision to treat is made by a physician. For Peyronie's, we have about a -- between a 57% to 60% penetration rate, which is a really nice penetration rate. But yet the decision to treat is still relatively low at about 14% and the diagnosis rate is less than 3%. So there's nice opportunity, nice runway there for us. For Dupuytren's contracture, we're getting 1 out of every 4 patients. So we get about 25% from a market penetration perspective. The treatment rates are a little higher, about a 30% treatment rate but, again, upstream, at the top of the funnel, the diagnosis rate is really low. So again, that's why we like -- we think it's a wonderful opportunity with XIAFLEX. And that's why, as Paul mentioned, it's about execution, it's about investment and we feel like there's opportunities to continue that strategy.

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Operator [46]

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And our next question comes from David Risinger with Morgan Stanley.

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Yih-Jiunn Chiu, Morgan Stanley, Research Division - VP and Research Associate [47]

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It's Yih-Juinn on for David Risinger. Could you please discuss Endo's pipeline and prospects for new launches over the next year or so?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [48]

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Sure. So this is Paul. I think in our presentation, we outlined several key products that we're excited about. Now we don't go into the exact launch date because we don't want to place ourselves at a competitive disadvantage. But as we've indicated in the slide presentation, we're upon success for CCH will start -- the goal here is to launch on success CCH in late 2020. So that's the first product we'd like to outline. We've talked about our relationship with Nevakar regarding RTU, ready-to-use formulations in critical care in hospital settings. We're excited about that. Our first product is successful, we're hoping we'll also launch in late 2020. And then what we've done here on our slide is we've talked about several key generic products that we're very excited about. However, we don't pinpoint the dates because the settlement terms and conditions are confidential. But they're large, hard to make and exciting products, products such as generic DEXILANT, which is a proton pump inhibitor, very, very difficult, challenging delayed-release type product that we have on our portfolio. AFINITOR is a product that we're also very, very excited about. It has about 4 strengths. However, we have exclusivity on 3 out of the 4 strengths. The [molecule's] about $800 million. However, we have access and are first-to-file position. So about half of that or $400 million. Again, a very, very challenging product to make. We've talked about AMITIZA, which is a product that is a soft gel that requires a clinical trial, also a very, very hard product to make and that product is about $500 million in brand sales. So that just gives you a little bit of an indication. If you go back to our presentation, there's 3 more products that we also disclosed, CIPRODEX, KUVAN, and GATTEX that are all very difficult products that are in our future pipeline. Thank you very much for the question.

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Operator [49]

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And our next question comes from Kevin Kedra with G. Research.

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Kevin Kedra, Morgan Group Holding Co. - Research Analyst [50]

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I apologize if this was asked earlier as I jumped on late. But with the CEO transition, there's a lot going on at the company between opioids. You have businesses on the brand side and on the generic side and you're getting into aesthetics. So kind of what 1 or 2 core capabilities do you feel that the CEO of Endo going forward should really bring to the table as you begin the process of looking for somebody to bring in? And then secondly, just wanted some clarification. I saw that on the balance sheet, you talked about a $9.1 million liability for legal settlement. It was a long-term liability. I assume that was tied to the Track 1 case settlement. So just surprised that this wouldn't be a near-term liability, something that would be paid out soon, given that there seems to be quite an emphasis for all the counties that they get paid immediately so that they can address the crisis. Just wondering kind of where -- how that timeline plays out for paying up that $10 million plus the $1 million of drug?

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [51]

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So Kevin, this is Paul. I'm maybe just a little uncertain regarding the balance sheet question. Can I just get a little more color on that? I want to make sure I fully understand.

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Kevin Kedra, Morgan Group Holding Co. - Research Analyst [52]

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Sure. So on the balance sheet, it looks like there was long-term liabilities. It looked like there was an added line of $9.1 million related to legal settlements. I wasn't sure if that was actually tied to opioid.

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Blaise Coleman, Endo International plc - Executive VP & CFO [53]

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Kevin, it's Blaise. Let me just -- thanks for the question on the liabilities. We do take a net charge to the balance sheet this quarter related to legal liabilities. We had some reversal of some accruals that we had previously accrued for certain legal matters. We took a charge for some other legal matters just in terms of truing up some balances. And the net impact there is that a portion of that does go to the long-term liability part of the balance sheet. In terms of the opioid settlement, just to clarify that question, that's been settled and that's already been paid. So that's not part of the change you're seeing in the balance sheet.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [54]

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And then Kevin, the question with respect to maybe some of the aspects of the CEO and succession plan, a very broad question. I mean when we look at this company, it's an incredibly exciting and dynamic company. You've got to look across. We've got 4 segments here, so we're going to need somebody that can look at our businesses objectively, understand the growth areas of Sterile and Specialty. We've got to be able to have excitement and build -- continue with the culture that we have across the segments. We've got 13 sites, we have 3,000 people. So we're going to need somebody that's going to be able to kind of rally -- continue to rally the group. But I would tell you that where we are as a company while I'm excited about my next phase in life, I also believe that I'm leaving this company in very, very good and talented hands. We have a lot of talented individuals in-house that are going to have an opportunity to be considered. And at this stage of the game, we've got an exciting pipeline and a portfolio that is going to fuel this company for the long-term. So it's going to be an exciting opportunity, but we're going to need somebody that can look across multiple segments and also Medical Aesthetics. So thank you for that question.

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Operator [55]

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Ladies and gentlemen, this concludes our Q&A portion of today's call. I would now like to turn the call back over to Mr. Paul Campanelli, President and CEO, for any closing remarks.

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Paul V. Campanelli, Endo International plc - Chairman, President & CEO [56]

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Thank you, operator. We appreciate your continued interest and support of the company, and we look forward to providing you with updates as we move forward. I want to thank everybody for joining us this morning. Have a great day.

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Operator [57]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.