| Laure Park | executive |
| Scott Hirsch | executive |
| Mark Bradley | executive |
| Rishi Parekh | analyst |
Thank you for standing by. Welcome to the earnings conference call for Endo Inc. This call is being recorded.
If you have any objections, you may disconnect at this time. I would now like to turn the call over to Laure Park, Senior Vice President, Investor Relations and Corporate Affairs.
You may begin.
Thank you, Emily. Good morning, and thank you all for joining us to discuss Endo Inc.'s Third Quarter 2024 financial results. .
Joining me on today's call are Scott Hirsch, Interim CEO and member of the Board of Directors; Mark Bradley, Executive Vice President and CFO; and Patrick Barry, Executive Vice President and President, Global Commercial Operations.
We have prepared a slide presentation to accompany today's webcast and that presentation as well as other materials are posted online in the Investors section at endo.com. Later this morning, a copy of our prepared comments will also be posted to the webcast -- website.
I would like to remind you that any forward-looking statements made by management on today's call are covered under the U.S. Private Securities Litigation Reform Act of 1995 and are subject to significant changes, risks and uncertainties described in our earnings release and other press releases and in our SEC filings.
Actual results may differ materially from those set forth in any forward-looking statements.
As previously disclosed, actually, all of Endo International's assets were acquired by Endo Inc. on April 23, 2024, and pursuant to Endo International's plan of reorganization. Endo Inc.'s third quarter 2024 results reflect the effects of the plan of reorganization and the application of fresh start accounting.
So to clarify, during the call, all references to third quarter 2024 results refer to Endo Inc., all references to third quarter 2023 results refer to Endo International plc.
In addition, during today's 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 may differ from non-GAAP financial measures used by other companies.
Investors are encouraged to review our current report on Form 8-K furnished with the SEC for our reasons for including those non-GAAP financial measures in our earnings release and presentation. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release issued earlier this morning, unless otherwise noted therein.
I would now like to turn the call over to Scott.
Thank you, Laure, and thank you to everyone joining us this morning. Starting with Slide 5.
During today's call, I will provide a third quarter performance and business update, including some thoughts on the company's opportunities given my 60 days inside. Mark Bradley will then walk you through the financial results and outlook, and then I will return with some closing comments before we open it up to your Q&A.
Slide 7. provides our third quarter operating performance and recent business highlights.
Third quarter 2024 total revenues of $427 million and adjusted EBITDA of $151 million were just of our preannounced results estimates from 2 weeks ago, which were issued as part of our term loan repricing. Compared to prior year, third quarter revenues decreased 6%, primarily attributable to the competitive pressures across the generic and sterile segments partially offset by solid revenue from our Branded Pharmaceuticals segment.
This is sequential improvement in performance compared to prior quarters as the competitive impact of losing exclusivity of key products, including VASOSTRICT and Varenicline had begun to stabilize.
Importantly, we are on track to deliver our full year 2024 revenue and EBITDA expectations as well as transition to growth.
Our performance in the third quarter was anchored by XIAFLEX with total revenue growth of 13% and strong performances across both on-market indications.
We also advanced our sterile injectable capabilities, including launching ADRENALIN ready-to-use bags during the first week of October.
In addition, we saw the cash generation strength of the business. Adjusted EBITDA grew 6%.
Our net leverage was reduced to 3.3x from 3.5x last quarter, and we successfully completed the repricing of our $1.5 billion term loan which I would like to thank our credit holders for their continued confidence.
Moving to Slide 8 and driving into the segment level performance, to the Branded Pharmaceuticals segment, which represents about 50% of company revenues. Segment revenues grew 7% versus third quarter 2023. This increase was primarily driven by strong XIAFLEX performance, XIAFLEX revenues were $128 million in the quarter, an increase of 13% compared to prior year. This increase was driven by strong underlying demand and increased average net selling price, volume increased approximately 7% and average net selling price increased by approximately 6% compared to the prior year.
During the quarter, XIAFLEX demand improved across both indications. Peyronie's disease revenues grew a very strong 16% and Dupuytren's contracture revenues grew 8% compared to the prior year. This performance reflects our continued focus on increasing patient and physician awareness as well as improving the HCP experience. The remainder of the branded segment, including the established products generated $89 million in the quarter, which was minus 1% relative to the previous year.
Third quarter 2024 Sterile Injectable revenues of $80 million were below prior year revenues of $95 million, this change was primarily attributable to the year-over-year competitive pressure related to VASOSTRICT as well as temporary supply disruptions in several products.
Importantly, we expect to see substantial resolution of the supply disruptions by the end of the year as well as overall moderation in the impact from VASOSTRICT competition as we lap the erosion from loss of exclusivity.
Turning to Slide 9.
Third quarter 2024 Generic Pharmaceutical segment revenues were $111 million, a decrease of 18% compared to prior year, this decrease was primarily due to competition for Varenicline tablets and dexlansoprazole, delayed release capsules. It was partially offset by revenue upside from lidocaine patch, the generic version of Lidoderm, Importantly, excluding Varenicline and dexlansoprazole, the segment grew 6% and gross margin improvements drove approximately 200 basis points of benefit relative to the prior year.
Third quarter 2024 revenues from the International Pharmaceuticals segment were $18 million, which was essentially unchanged compared to the prior year.
Looking forward, I'd like to highlight some of the future performance levers the business is utilizing within our Branded and Sterile growth pillars.
Turning to Slide 10. XIAFLEX is the only FDA-approved nonsurgical therapeutic option for patients with Peyronie's disease and Dupuytren's contraction. Both can have low diagnosis and treatment rates and a small increase in those diagnosis rates can have a significant impact for patients who prefer nonsurgical options.
We are increasing our investment in a combination of branded and unbranded direct-to-consumer awareness campaigns, focused on motivating potential patients to both seek a diagnosis and inquire about nonsurgical treatment options.
We continue to be pleased by the patient activation across both indications, including the overall increase in visits to our websites and physician locators where disease-related education and tailored access to a local trained specialist increases patient adoption. Increasing patient knowledge and adoption is critical for both our business and that of our health care practitioners. Five years ago, Pro Football Hall of Famer John Elway, helped to increase awareness of Dupuytren's contracture by telling his XIAFLEX treatment story. In the coming weeks, we plan to launch a new Dupuytren's contracture PR campaign, sharing a patient XIAFLEX experience.
We believe that a high-touch provider approach focused on education and a seamless XIAFLEX acquisition experience, will increase physician loyalty and support the preferential use of XIAFLEX as a nonsurgical treatment option. Accordingly, last month, at the Annual Meeting of the American Society for Surgery of the Hand, we unveiled our mixed reality injection simulate over 300 hand specialists. The simulator provides an immersive physician learning experience to help hand specialists refine their technique by allowing them to interact with physical and digital objects simultaneously.
We believe this technology will support injection training and help build inject their confidence. It is also important that we continue to advance real-world studies and provide information on HCPs better support their patients. At the recent Sexual Medicine Society of America Annual Meeting, there were 7 presentations related to Peyronie's disease and XIAFLEX.
Turning to Slide 11.
In addition to the growth potential for XIAFLEX on-market indications, we have been exploring the potential to drive XIAFLEX growth by expanding into new musculoskeletal and neurological indications. This morning, we provided an update from our early Phase II Plantar Fasciitis clinical study.
While study participants receiving one treatment of XIAFLEX 0.6 milligrams showed numerical improvement from baseline on the pain intensity numeric rating scale compared to placebo. The difference was not statistically significant.
However, an initial post hoc analysis indicates that the results were clinically meaningful for a subpopulation of patients with moderate to severe pain at baseline.
We will now evaluate the data in more detail to determine if further clinical work in this moderate to severe patient population is warranted. Alongside Dupuytren's contracture, the Plantar tower indications or opportunities to expand our orthopedic platform, specifically to garner incremental presence in the sports medicine category, which is a high-growth subspecialty within Orthopedics and and to do so with a synergistic utility of our ortho sales force.
Our other musculoskeletal and neurological indications provide semi-attractive life cycle opportunities. This was a logical, clinical R&D shot on goal with very capitated risk for substantial upside and with a biologic that has long durability.
As I noted, we will look at the best next steps for the Plantar Fasciitis program and also use this opportunity to take a fresh look at our full range of future indications for XIAFLEX as well as assess both organic and inorganic capital allocation opportunities for the entire business.
Turning to Slide 12. Sterile Injectable and acute care capabilities are the second critical pillar of our future growth.
Over the past several years, we have evolved and expanded our pipeline and manufacturing capabilities to support the introduction of more unique products that meet the evolving needs of customers. Recently, we received the establishment inspection report for our indoor sterile site, and we are hopeful to receive final FDA approval by year-end. The potential in this segment and the long-term pipeline of over 50 projects is something that I've been digging into over the last several weeks. And in my view, it is a very exciting opportunity.
So I wanted to take a brief moment to outline several thoughts. Currently, Greater than 95% of U.S. hospitals use an Endo product, and that foundation is a critical factor in our future pipeline success. The opportunity in front of our sterile injectables business is to leverage our hospital footprint, along with our commercial and manufacturing capabilities to provide a unique offering within the acute care segment, meaning hospital ORs, ERs and surgical centers.
While the U.S. has arguably the best hospitals in the world, the operating environment within the acute care setting is subject to an ever-growing demand. This translates into greater patient volumes and expanding treatment protocols. Hospitals further operate under DRG procedure-based reimbursement, which means it is ultimately up to the hospital to manage both quality of patient outcome and costs under these capitated procedure rates. This Is where our Sterile Injectable business comes into play.
With the provision of medications in final and finished forms such as prefilled syringes, pre-dose bags that are ready to use, accurately measured and most importantly, our FDA-approved medications manufactured in FDA-approved facilities. Not only does this offering provide a step function improvement in the simplicity to a hospital environment, which if you've ever been to an ER, you know is subject to a great deal of complexity and time constraint, but also has the potential to reduce error rates, reduce pharmacy tech, nursing staff and hospital labor costs as well as product waste.
This creates an opportunity for our hospital to achieve better patient outcomes with faster, more accurate patient dosing, along with less waste for multi-dose vials and hence, higher profitability under their reimbursement codes. Approximately 60% of our sterile injectable pipeline projects are planned and ready-to-use formulations that help to meet this need. We recently launched ADRENALIN ready-to-use bags in early October, and we are pleased with the early demand for the product.
Our bag is the first and only FDA-approved epinephrine ID bag prepared by a manufacturer and allows for improved time to treatment and workflow efficiencies.
We expect to launch two more sterile injectable products before the end of 2024 and and plan to continue progressing our Sterile Injectable development pipeline.
Moving to Slide 13.
Following the financial restructuring that was completed earlier this year, Endo now has a healthy balance sheet and is free of legacy overhangs.
Specifically, the company has significantly lower funded debt and lower spendings, including the impact of the term loan repricing last week. Net leverage is now approximately 3.3x, a significant improvement from prior to emergence and even decreasing quickly with a reduction from 3.5x at the end of just last quarter.
In addition, the company has significantly improved both its freedom to operate and its focus on creation, having now alleviated litigation, tax and other overhangs with legacy matters.
With that, let me turn the call to Mark, who will take us through the rest of the financial discussion. Mark?
Thank you, Scott. On Slide 15, you will see a summary of our enterprise financial results for the third quarter of 2024 compared to prior year.
As Scott previously discussed, Third quarter 2024 revenue decreased compared to prior year as declines in revenue from our Sterile and Generics businesses were only partially offset by the strong growth in revenue from our branded business.
Third quarter 2024 adjusted EBITDA increased compared to prior year, primarily due to higher adjusted gross margin and lower adjusted operating expenses. Adjusted gross margin was approximately 67% in third quarter 2024 compared to approximately 64% in the prior year. This increase was primarily driven by changes in product mix, coupled with manufacturing productivity improvements, primarily in our generics business compared to prior year.
Adjusted operating expenses decreased compared to prior year primarily driven by lower R&D expenses associated with certain nonrecurring contractual credits that were received during the quarter.
Third quarter 2024 adjusted net income was approximately $62 million compared to approximately $131 million in the third quarter 2023. This decrease was primarily due to an increase in interest and adjusted income tax expenses compared to prior year.
We ended the third quarter with approximately $368 million of unrestricted cash and cash equivalents compared to approximately $294 million at the end of second quarter 2024.
As Scott previously mentioned, we also ended the third quarter with a net debt to adjusted EBITDA ratio of approximately 3.3x compared to 3.5x at the end of the second quarter. This improvement was driven by the higher unrestricted cash balance, coupled with higher adjusted EBITDA over the last 12-month period compared to the second quarter.
When looking at the statement of cash flows, I would like to highlight that cash from operations in third quarter 2024 reflects the final payment of certain escrowed professional fees incurred in connection with Endo International PLC's plan of reorganization, which are also reflected in the $79 million decrease in restricted cash, coupled with an increase in both interest and income tax payments compared to prior year.
As Scott also previously mentioned, last week, we successfully completed a repricing of our $1.5 billion senior secured term loan. The repricing reduced the applicable interest rate on the term loan by 50 basis points to SOFR plus 400 basis points. All other terms remain substantially unchanged. The repricing will reduce cash interest expense by approximately $8 million annually.
Advancing to Slide 16, based on our third quarter performance and fourth quarter expectations, we are reaffirming our full year 2024 financial expectations with total revenues and adjusted EBITDA.
As a reminder, full year 2024 financial results include the results of Endo International plc from January 1 through April 23 and the results of Endo Inc. from January 1 through December 31. Based on third quarter results and fourth quarter expectations, we continue to expect total revenues to be between $1.72 billion and $1.78 billion and adjusted EBITDA to be between $635 million and $655 million.
We are a highly cash generative business and continue to expect a high EBITDA to pretax unlevered free cash flow conversion ratio.
While total revenue expectations for the full year remain unchanged, based on third quarter results we are refining our full year segment revenue assumptions for Sterile Injectables and generic pharmaceuticals. We now expect Sterile Injectables revenues to be between $350 million and $370 million and Generic Pharmaceuticals revenues to be between $430 million and $440 million.
With respect to branded revenue assumptions, as we previously disclosed, fourth quarter 2023 XIAFLEX revenues benefited from a nonrecurring adjustment of approximately $14 million associated with the application of the final bio wastage rebate determination. Adjusted gross margin for the full year 2024 is expected to remain unchanged at approximately 67% of total revenues. Gross margin in the fourth quarter is expected to be slightly lower than the first 3 quarters of the year, primarily due to the shift in product mix, mainly within the Sterile and Generics segments, coupled with certain credits and other adjustments that benefited the first 3 quarters that are not expected in the fourth quarter.
We continue to expect adjusted operating expenses for full year 2024 to be between $595 million and $615 million.
Finally, we are on track to grow total company revenues in 2025 and we'll provide more detailed 2025 financial expectations in the normal course as part of year-end 2024 earnings in early 2025.
I will now turn the call back over to Scott for a few closing remarks.
Thank you, Mark.
Before my closing comments, I want to give a quick update on the CEO search and national exchange listing process.
First, we have met with impressive candidates and the Board is working with deliberate speed to identify and appoint the best individual to lead the company forward. I do not have a more specific timeline to communicate at this point. With regard to our goal of uplifting our stock to a national exchange, we have been actively engaged in that process and believe we will have achieved the eligibility requirements to transition to the NYSE during this month.
However, after consultation with our capital markets advisers, we have decided to defer the timing of our NYSE uplisting from the very end of 2024 to an appropriate date in 2025.
Turning to Slide 18 and closing our comments.
Our on-market XIAFLEX indications are showing strong growth with meaningful future opportunity to increase diagnosis and treatment rates, along with the potential for additional musculoskeletal or urological indications to expand the longer-term growth profile of our biologic.
With regards to our injectable solutions and acute care platform, we believe Endo has a significant advantage in a complex and high barrier to entry market with the potential to generate attractive future revenue growth.
We have a healthy balance sheet, strong cash flow and the opportunity to now deploy those cash flows towards both organic and inorganic growth drivers.
Finally, over the past 2 months, I have met many of the Endo team members and appreciate the commitment they bring to work every day. I want to thank them for their hard work and their service to our customers and their patients.
I'll now turn the call back over to Laure to manage Q&A.
Thank you, Scott. Emily, can we have our first question, please.
[Operator Instructions]
The first question comes from Rishi Parekh from JPMorgan.
First, on the Plantar, and I apologize I've been moving around between calls. But given the announcement that you put out this morning in terms of primary endpoints of Phase II. I noticed that you moved the launch date from 2029 to 2028. Any reasons for that change? And are you making any changes to your target focus as it relates to this particular indication post this Phase II?
Rishi, it's Laure.
You know what, that is an err on my part on that, and the date has not changed.
And then in terms of -- in the second quarter presentation, you did provide some estimates around 2025. Are we to assume that, that still holds in this quarter? And then I just want to confirm that your assumptions for 2025 will just mostly just shift into being a benefit in 2026.
Thanks, RIshi, for the question. It's Mark.
We aren't providing any updates to 2025. At this time, we will provide that in the ordinary course in early 2025 in connection with our 2024 final results.
At this time, we have no other questions. Please proceed.
Thank you for joining us this morning. We look forward to providing updates as we move forward, and we hope everyone has a good day. Thank you.
Ladies and gentlemen, this concludes the conference.
You may now disconnect your lines.