Endo Pharmaceuticals Holdings Inc.

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Endo Pharmaceuticals Holdings Inc.

100 Painters Drive
Chadds Ford, Pennsylvania 19317
U.S.A.
Telephone: (610) 558-9800
Fax: (610) 558-8979
Web site: http://www.endo.com

Public Company
Incorporated: 1997
Employees: 492
Sales: $615.1 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: ENDP
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Endo Pharmaceuticals Holdings Inc. is a publicly traded company based in the Philadelphia, Pennsylvania area, dedicated to the niche of pain management. Endo develops and sells both branded and generic prescription pharmaceuticals, with its manufacturing contracted out to third parties. Endo's branded products include Percocet, using oxycodone and acetaminophen to treat moderate to moderately severe pain; Percodan, using oxycodone and aspirin to treat less severe pain; the Lidoderm patch, used to relieve pain caused by shingles; and Frova, using frovatriptan to treat migraines. The company also offers branded pharmaceuticals to relieve serious coughing and congestion: Hycodan, Hycomine, and Hycotuss. On the generic side, Endo markets Morphine Sulfate ER (extended release) tablets to treat moderate to severe pain, and Endocet, a generic equivalent to Percocet. Endo markets its products to primary care physicians and specialists, as well as to other healthcare professionals and retail pharmacies. The company is 60 percent owned by investment firm Kelso & Company.

Company Heritage Dating to the 1920s

The heritage of the Endo name dates to 1920 when five brothers of the Ushkow family established Endo Laboratories, a small pharmaceutical company, in Manhattan, New York. The family-run business eventually relocated to Long Island, and then in 1969 was acquired by E.I. du Pont de Nemours & Company, better known as DuPont. Just three years earlier DuPont had become involved in the pharmaceutical industry after one of its researchers developed an antiviral drug called Symmetrel, effective in treating flus. The primary reason DuPont acquired Endo was because of its marketing capabilities. Unfortunately Endo's marketing efforts failed to achieve the kind of growth DuPont was looking for in Symmetrel, due in large measure to the bureaucracy of the parent company. By the early 1980s Endo was generating about $100 million in annual sales, hardly enough to prompt DuPont, which had more than $22 billion in annual sales at the time, to take much notice. Endo began developing other drugs, although in 1983 DuPont decided to stop using the Endo name for its pharmaceutical division.

In 1989 DuPont and giant pharmaceutical Merck and Company entered into a research and marketing arrangement. This collaboration led a year later to the two parties creating an independent joint venture, The DuPont Merck Pharmaceuticals Company, to which DuPont contributed its pharmaceutical holdings. The resulting company proved to be a cipher to customers, who were unsure what to make of its mix of injectable drugs, off-patent brands, and the other products it distributed for other companies. In the fall of 1993 Dupont Merck decided to achieve some focus by establishing a subsidiary to serve as its generic division. For a company name executives drew on the old Endo name, which surveys showed that despite a decade-long absence was still remembered positively by 85 percent of pharmacists. The division was formed in early 1994.

The first successful product offered by Endo Laboratories LLC in May 1994 was cimetidine, a generic equivalent of SmithKline Beecham's Tagamet, followed a few months later by a generic version of Glucotrol. In December 1994 Endo began distributing products marketed by West Point Pharma, Merck's generic operation. Endo also secured the marketing rights to some of the multisource products produced by DuPont Merck, as well as developing its own generics through a strong research and development effort.

Heading Endo was President Carol Ammon, supported by Louis Vollmer, vice-president of sales and marketing, both of whom, along with college friend Mariann MacDonald, head of DuPont Merck's generic-drug manufacturing, had grown up on Long Island, virtually in the shadow of the old Endo plant. MacDonald, in fact, had gone to work for Endo in 1969 before it was acquired by DuPont, and Ammon joined the company four years later, at a time when the old entrepreneurial spirit of the company was still present. The three of them had successfully lobbied DuPont Merck to reinstate the Endo name for the new generic division.

Ammon and MacDonald had worked together for years and were close friends. They now became part of a team put together by DuPont Merck to determine what to do about some old pain medications, such as Percodan launched in the 1950s and Percocet launched in the mid-1970s. The patents had long expired and the products were now losing sales to cheaper generics. Faced with the choice of either investing in these drugs to expand their markets or selling them, the recommendation was to sell. In effect, Endo wanted to cast off its pain management franchise, an area to which Ammon had devoted much of her career. She recognized that pain management was an underserved area, neglected by major pharmaceutical firms in search of high-margin sectors. But she also observed a changing attitude in the public about pain management that presented a niche opportunity for a small company willing to focus on it. Prior generations, hardened by the experience of the Great Depression and World War II, were far more stoic about enduring pain than members of the Baby Boom generation, who were less interested in pleasing a doctor and more than willing to acknowledge when they were experiencing uncomfortable pain. In the early 1990s pain management became a specialty and physicians could now take their residency in it. Moreover, hospitals were now rated on how well they assessed and treated pain.

Management Team Launch of
Endo Pharmaceuticals in 1997

According to a Philadelphia Inquirer company profile in 2003, "Ammon recalls how she ran into the office of her colleague and longtime friend, MacDonald.… 'Look, we can buy these products. Do you want to?' MacDonald's answer, 'Yes.' 'Maybe you want to go home to talk to your husband? We may not have a job if this doesn't work out.' MacDonald didn't hesitate. 'No, I'm in.'" They then recruited Vollmer as a third partner and began meeting with Wall Street investment firms, eventually settling on a partner, Kelso & Co., which helped it to raise $277 million in equity investment and loans. In August 1997 the three bought 35 branded and generic medicines from DuPont Merck along with the Endo name, and in November they incorporated Endo Pharmaceuticals Holdings Inc.

Although there were few success stories of companies that succeeded in combining branded drugs with generics, Endo's management team was not concerned, since all three of them were experienced in both areas. Their focus was on the therapeutic niche, pain management, which they sought to serve with either brands or generics. By offering generics of the very same brands it sold, Endo was not cannibalizing sales, but actually growing it, since brands and generics served different markets. Moreover, the selling of generics allowed for maximum use of manufacturing capacity.

Endo established its headquarters in Chadds Ford, Pennsylvania, and a laboratory on Long Island, where it conducted research on analgesic drug technology, supplemented by the work of specialty research and development firms. The company also formed two divisions: Endo Laboratories, to market multisource brands including Percocet, Percodan, Symmetrel, Hycotuss, Hycomine, and Hycodan; and Endo Generic Products, which started out with 25 generic products, including cimetidine, captopril, and etodolac. To quickly get up to speed, branded sales were assigned to a contract sales force. Generics, on the other hand, were less labor-intensive, so inside people were able to handle that business.

While R&D efforts began to put products in the pipeline, Endo looked to build sales on some of its well-known branded products. The flagship product, Percocet, for example, was so established that the vast majority of prescriptions for generic oxycodone/acetaminophen were written down as Percocet. With further study of prescriptions, it became apparent to Endo that physicians would order Percocet if it were available in doses other than just five milligrams. The company sought and received FDA approval on different doses, adding 2.5-, 7.5-, and 10-milligram versions, and as a result Percocet experienced strong growth, despite the lack of patent protection. Sales increased from $40 million in 1997 to $214 million in 2003.

Another Endo success story of the 1990s was Lidoderm, a drug that was not developed by the company. Instead, it was the work of a retired pharmaceutical chemist who concocted a homemade salve to relieve the suffering of his wife, who was enduring the pain of shingles (a recurrence of the chicken pox in adults) on her back. Diana Hind was part of the 20 percent of patients in whom shingles damaged the nerves in skin, resulting in constant, severe pain—postherpatic neuralgia. To receive just six hours of relief, she had to endure 45 minutes of injections of lidocaine, spaced every half-inch across her back and just under the surface, lest the anesthetic enter the bloodstream and cause harmful side effects. Before his retirement, Mr. Hind headed a company that developed eye and skin drugs, and he now used that expertise to mix a homemade salve using lidocaine, which he then applied to his wife's back one night in a makeshift patch of plastic wrap and tape. When she woke up in the morning, the pain had vanished. Mr. Hind then developed a 5 percent lidocaine solution hand-sized patch, which gained FDA approval and which Endo began marketing as Lidoderm in 1999. Sales of Lidoderm were strong and steady, reaching about $40 million in 2001 and more than doubling a year later to $83.2 million.

Company Perspectives:

Endo's vision is to become a premier specialty pharmaceutical company anchored in pain management, with a balanced focus in complementary therapeutic areas.

Endo also looked to grow by external means. In November 1999 it reached an agreement to acquire Algos Pharmaceutical Corporation, a New Jersey-based biotech company that also specialized in pain management products. After some adjustments in the terms, the $250 million stock swap closed in July 2000. As a result, Endo received new pain management drugs, the most important of which was MorphiDex, which combined morphine and dextromethorphan to provide relief from moderate-to-severe cancer pain. Because Algos was a public company, Endo was able to become a public company as well.

Stock Offering Highlight of 2001

Endo's balance sheet reflected strong growth since the company's formation, due primarily to the launch of new doses of old products. Endo posted a net profit of $201,000 in 1998, then a year later saw sales increase 28 percent to $138 million and net income to $3.26 million. Sales grew another 43 percent in 2000 to $187.4 million. Endo was established enough that it was able to use its public status to make a secondary stock offering in September 2001, raising about $140 million, which was used to pay off bank debt.

Endo's growth did not come without difficulties, however. The company suffered a setback in 2002 when MorphiDex failed to demonstrate in a late-stage clinical trial that it performed better than simple morphine in relieving pain. Endo abandoned the project and investors dealt out punishment, bidding down the price of its stock. Endo also became entangled in litigation, a not uncommon distraction in the pharmaceutical industry. In October 2000, The Purdue Frederick Company sued Endo, alleging that Endo had infringed on patents relating to OxyContin by developing a generic form of the drug. Endo prevailed because it was able to show that Purdue had made misrepresentations on its drug application, claiming to have made a discovery without actually conducting any clinical studies. As a result, a judge ruled the patent invalid, allowing Endo to proceed. Purdue filed further suits, lost, and appealed. The matter was aired at trial conducted at the U.S. Court of Appeals in Washington, D.C., in November 2004, with the result expected sometime in 2005. In early 2001 Endo sued Watson Pharmaceuticals Inc., a California generic-drug maker with whom it had considered forming an alliance. During 1998 talks, Endo shared its plans to develop a new Percocet product, one that included Tylenol's active ingredient, acetaminophen. Watson, which had signed a confidentiality agreement, then ended the talks and subsequently sought FDA approval for a generic version of Endo's new Percocet variant. Despite Endo's suit, Watson ultimately gained FDA approval and began marketing its generic product. Endo also became involved in litigation with GlaxoSmithKline P.L.C. in 2001, a challenge that proved successful, concerning Endo's attempts to sell a generic form of Paxil, an anti-depression drug.

Endo increased sales to $252 million in 2001, due to the launch of new strengths of Percocet and the strong growth of Lidoderm. Those two drugs again led the way in 2002 and 2003. Endo increased sales by 58 percent to $399 million in 2002, followed by another jump of 49 percent to $595.6 million in 2003. Also of note in 2003 was the move of R&D operations from Garden City to a more modern location, a 24,000-square-foot center in Westbury, located on Long Island. In 2003 Endo added a pair of painkillers, paying $120 million to British biotech SkyePharma for the rights to Depomorphine and Propofol IDD-D, along with options on other products.

In 2004 Endo launched a pair of branded drugs: Frova and DepoDur, and along with continued strong growth in Lidoderm, the company was able to increase sales to $615.1 million. Although this was not a sizable gain over the previous year, the company was able to increase net income to $143.3 million in 2004, more than doubling the $69.8 million recorded in 2003. Endo also strengthened its pipeline, which included some near-term products. Given the growing pain management sector, Endo was well positioned to enjoy sustained growth.

Principal Subsidiaries

Endo Pharmaceuticals Inc.; EPI Company; BML Pharmaceuticals, Inc.; Endo Pharma Canada Inc.

Principal Competitors

Pain Therapeutics, Inc.; Pfizer Inc.; Purdue Pharma L.P.

Key Dates:

1920:: Endo Laboratories is founded by the Ushkow family.
1969:: DuPont acquires Endo.
1983:: DuPont drops the Endo name.
1994:: The Endo name is revived as a generic division for the DuPont Merck joint venture.
1997:: A management team acquires the DuPont Merck pain management drugs and the Endo name.
2000:: Endo becomes a public company by acquiring Algos Pharmaceutical Corporation.
2001:: A secondary stock offering is completed.