exhibit4.htm


     

     

    


    

      
        
          
            	
                    July
                      27, 2007

                  
	 
	
                    Mr.
                      Peter Lankau

                    Chief
                      Executive Officer

                    Endo
                      Pharmaceuticals Holdings, Inc.

                    100
                      Endo Boulevard

                    Chadds
                      Ford, PA 19317

                     

                  
	
                    Dear
                      Mr. Lankau:

                  
	
                    As
                      you are aware D. E. Shaw Composite Portfolios L.L.C. and certain
                      of its
                      affiliates (collectively “we” or the “D. E. Shaw group”) beneficially own
                      approximately 5.6% of the outstanding shares of Endo Pharmaceuticals
                      Holdings Inc. (“ENDP” or the “Company”).

                     

                  
	
                    Over
                      the past several months we have had a constructive dialogue
                      with you and
                      your management team on the Company’s current prospects and longer-term
                      strategic vision.  We continue to believe that ENDP’s current
                      portfolio consists of highly valuable products (including Lidoderm,
                      Opana
                      IR and ER, and Frova) that provide the Company with the commercial
                      presence in pain management that is required to be considered
                      “world-class.”  In addition, the Company’s cash balance remains
                      a widely misunderstood and undervalued asset.  We believe the
                      true fair value of ENDP is being discounted due to 1) inefficient
                      capital structure, 2) publicly stated intention to diversify away
                      from pain management, and 3) the perceived risk of Lidoderm
                      genericization.

                     

                  
	
                    Over
                      the last 12 months, ENDP has underperformed relative to the
                      DJIA, NASDAQ,
                      and S&P 500.  These indices have appreciated 26.7%, 31.8%,
                      22.8% respectively versus 11.5% for ENDP.  ENDP currently has
                      approximately 3 times the net cash per share of the Company’s peer
                      group1 and applying valuation
                      metrics that appropriately account for cash and debt (i.e.,
                      P/E

                     

                  


          

        

      

      

        

      

        
        1
          Peer group includes
          ALO, BRL, CEPH, ELN, FRX, KG, MRX, MOGN, SEPR, VRX, WCRX,
          WPI

      


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      




     

    

      
        
          	
                  As
                    mentioned above, we believe that three issues contribute to this
                    valuation
                    gap:  1) inefficient capital structure, 2) publicly
                    stated intention to diversify away from pain management, and
                    3) the
                    perceived risk of Lidoderm genericization.  Each of these topics
                    is worth further discussion:

                   

                
	
                  Inefficient
                    capital structure.  As of the end of Q1 2007, ENDP had
                    a net cash position of

                  $731
                    million, or 16% of the Company’s market capitalization.  In
                    addition, ENDP is generating greater than $200 million of cash
                    per year
                    and growing.  The conscious decision to hold all of this cash on
                    the Company’s balance sheet while management continues to assess the
                    strategic landscape is destroying value as the market gives ENDP
                    no credit
                    for this cash.  While the Company’s cash leaves it the
                    flexibility to consider and make acquisitions, ENDP has been
                    guiding to
                    complete a near-term transaction for the last 10 months and the
                    present
                    value of the cash asset continues to decline.  By more
                    effectively deploying this cash in the near-term, ENDP can substantially
                    improve its present and future valuation with no risk of impairing
                    the
                    ability to pursue a future transaction.

                   

                
	
                  The
                    Company’s large cash position could be used to fund highly accretive
                    share
                    buybacks that would likely create value far in excess of your
                    expected
                    interest income.  One option is:  a $1.5 billion
                    levered buyback at $35 per share funded using $500 million in
                    available
                    cash and $1 billion in a hybrid debt structure at 5% (2.2 times
                    net debt
                    to CY07 consensus EBITDA1
                    leverage) would increase earnings per share by more than
                    20%.  In this scenario we believe the Company would retain
                    sufficient financial flexibility to execute appropriate strategic
                    transactions as they arise.

                   

                
	
                  Publicly
                    stated intention to diversify away from pain management decreases
                    attractiveness to strategic acquirers.  We believe the
                    Company’s world-class commercial presence in pain management, large and
                    growing product portfolio, and significant cash flow are of obvious
                    value
                    to a wide spectrum of strategic and financial acquirers.  Our
                    conversations with investors, advisers, and executives in the
                    healthcare
                    space have supported this view, and we strongly believe that
                    ENDP is an
                    attractive acquisition target.  However, we are concerned that
                    the Company’s public intention to diversify away from pain management via
                    a major transaction would meaningfully dilute the value of these
                    assets
                    while also increasing the risk profile of the business.  While
                    we are typically very supportive of the Company’s capital being allocated
                    to new opportunities at attractive prices, we are not convinced
                    that such
                    a deal is out there.  In fact, the inability to consummate an
                    attractively priced deal over the last 9 to 12 months supports
                    this
                    concern.  In these scenarios, we are perfectly happy to benefit
                    from the strong cash flow via an optimized balance sheet.

                   

                
	
                  Even
                    if a strategic transaction is being considered, we believe it
                    is
                    imperative that management and the Board of Directors thoroughly
                    evaluate
                    all strategic alternatives prior to embarking on a major diversification
                    initiative to ensure the highest value to shareholders.  As a
                    strategic acquisition candidate, ENDP provides a portfolio of
                    growing pain
                    products already generating revenue in excess of $1 billion per
                    year, a
                    pipeline of pain opportunities, and reliable cash flow of over
                    $200
                    million per year—all highly valuable assets in the pharmaceutical
                    market.  The current market dynamic, which is characterized by
                    near-term revenue gaps, sparse pipelines, and limited new growth
                    opportunities, only bolsters this value.  Additionally, there is
                    a myriad of potential synergies in a strategic transaction, including
                    opportunities to commercialize select ENDP drugs outside the
                    United States
                    and to reduce redundant commercial and administrative infrastructure,
                    clinical spend, and overhead.

                


        

      

       

       

        

      

        1
        Source: Capital
        IQ


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      


        
          
            	
                    Lidoderm
                      genericization risk.  While the market appears to
                      discount the Company’s valuation based on perceived risks of Lidoderm
                      genericization, we believe the risk to the Lidoderm business
                      is
                      overstated.  Specifically:

                  


          

        

      

      
      

       

      

        
          
            	
                    ▪

                  	
                    The
                      Lidoderm IP estate is broad and sound—the product currently has five
                      Orange Book listed patents covering formulation and method
                      of use that
                      must be challenged successfully prior to generic
                      approval.

                  
	
                    ▪

                  	
                    The
                      Lidoderm IP estate is broad and sound—the product currently has five
                      Orange Book listed patents covering formulation and method
                      of use that
                      must be challenged successfully prior to generic
                      approval.

                  
	
                    ▪

                  	
                    The
                      Office of Generic Drugs (“OGD”) recommendation on an abbreviated generic
                      pathway for Lidoderm is onerous, particularly in its requirement
                      that the
                      size of patch and level of lidocaine in the patch pre- and
                      post-treatment
                      be identical to the branded comparator, decreasing the possibility
                      of
                      “inventing around” the existing Lidoderm formulation
                      patents.  Additionally, the recommendation has not yet accounted
                      for the fact that the Lidoderm label clearly states that the
                      product acts
                      locally rather than systemically and Lidoderm does not cause
                      complete
                      sensory block of the treated area.  We expect that OGD and FDA
                      will need to address both of these issues, and possibly the
                      issue of
                      “skinny labeling” before approving a Lidoderm generic.

                  
	
                    ▪

                  	
                    In
                      the event of a paragraph iv filing, Lidoderm will still have
                      31.5 months
                      of protection under the Hatch Waxman statute after a paragraph
                      iv generic
                      filing (45 days to file suit from notification, automatic 30
                      month stay of
                      action).

                  
	
                    ▪

                  	
                    The
                      Company has filed a thorough and scientifically valid Citizen’s Petition
                      that must be addressed by FDA before final action is taken
                      on any
                      application.  At a minimum, the Citizen’s Petition should force
                      FDA and OGD to agree on how to treat the questions of local
                      versus
                      systemic efficacy and skin irritation/sensitization when assessing
                      a
                      generic filing.

                  
	
                    ▪

                  	
                    Branded
                      transdermal products historically retain significant revenue
                      after
                      genericization due to the limited number of generic companies
                      with
                      approvable patch capability and the traditional difficulty
                      in
                      manufacturing patches on a commercial scale (e.g., Duragesic,
                      Climara).

                  


          

        

      

      
        
          
            	
                    While
                      the risk of Lidoderm genericization is out of management’s direct control,
                      we believe management has taken appropriate steps to protect
                      the product
                      by filing a well-reasoned Citizen’s Petition and publicly expressing
                      continued confidence in the current Lidoderm patent
                      estate.  However, we believe management is being overly
                      conservative on both the balance sheet and the need to diversify
                      versus
                      the actual risk to Lidoderm.

                  


          

        

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

        
          
            	
                    Despite
                      management’s extremely conservative view of the franchise, we continue
                      to
                      believe ENDP has an outstanding fundamental business in pain
                      management.  However, we believe the ongoing valuation gap
                      relative to peers can be addressed by making the Company’s capital
                      structure more efficient.  Additionally, we believe the Board of
                      Directors must first consider all strategic alternatives prior
                      to pursuing
                      a transaction to diversify away from pain management.  In the
                      absence of taking initiatives to address these issues, we have
                      little
                      confidence that ENDP shares will appreciate to fair value in
                      a timely
                      manner.  On the other hand, by pursuing these initiatives, we
                      believe ENDP’s management and Board of Directors will unlock significant
                      value for the Company’s shareholders.

                  
	
                    We
                      are happy to meet with management and/or the Board of Directors
                      at their
                      convenience to discuss our views.  Thank you for your
                      consideration and we look forward to continuing our constructive
                      dialogue.

                  


          

        




       

      D.
        E.
        Shaw Composite Portfolios, L.L.C.

       

       

      By:           D.
        E. Shaw & Co., L.L.C., its managing member

       

      


       

      


      By:                                                                              

      James
        Mackey

      Authorized
        Signatory

      

        

      

        
         

         

      


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      




      
        
          	
                  NOTHING
                    IN THIS LETTER CONSTITUTES TAX, LEGAL (INCLUDING WITHOUT LIMITATION
                    INTELLECTUAL PROPERTY), INVESTMENT, OR TAX ADVICE.  THE COMPANY,
                    ITS MANAGEMENT, AND ITS BOARD OF DIRECTORS SHOULD CONSULT ITS
                    OWN ADVISERS
                    FOR ADVICE CONCERNING THE VARIOUS CONSIDERATIONS RELATING TO
                    THE MATTERS
                    OUTLINED OR REFERRED TO IN THIS LETTER.  NONE OF
                    D. E. SHAW COMPOSITE PORTFOLIOS, L.L.C., D. E. SHAW
                    & CO., L.P. (ITS INVESTMENT ADVISER), D. E. SHAW & CO.,
                    L.L.C. (ITS MANAGING MEMBER), AND ANY OTHER ENTITY IN THE
                    D. E. SHAW GROUP; NOR THEIR AFFILIATES; NOR ANY SHAREHOLDERS,
                    PARTNERS, MEMBERS, MANAGERS, DIRECTORS, PRINCIPALS, PERSONNEL,
                    TRUSTEES,
                    OR AGENTS OF ANY OF THE FOREGOING IS RESPONSIBLE FOR GIVING,
                    OR IS LIABLE
                    FOR, ANY LEGAL, INVESTMENT, OR TAX ADVICE WITH RESPECT TO THE
                    COMPANY NOR
                    SHALL BE LIABLE FOR ANY ERRORS (AS A RESULT OF NEGLIGENCE OR
                    OTHERWISE TO
                    THE FULLEST EXTENT PERMITTED BY LAW IN THE ABSENCE OF FRAUD)
                    IN THE
                    INFORMATION, BELIEFS, AND/OR OPINIONS INCLUDED IN THIS LETTER,
                    OR FOR THE
                    CONSEQUENCES OF RELYING ON SUCH INFORMATION, BELIEFS, OR
                    OPINIONS.  ANY INFORMATION, BELIEFS, AND/OR OPINIONS PROVIDED IN
                    THIS LETTER CONSTITUTE THE UNDERSTANDING OF THE ENTITY PROVIDING
                    SUCH
                    INFORMATION, BELIEFS, AND/OR OPINIONS AS OF THE DATE OF THIS
                    LETTER, ARE
                    SUBJECT TO CHANGE WITHOUT NOTICE, AND MAY NOT REFLECT THE CRITERIA
                    EMPLOYED BY THE ENTITIES IN THE D. E. SHAW GROUP TO EVALUATE
                    INVESTMENTS.  NO REPRESENTATION IS MADE THAT THE STATISTICS AND
                    OTHER INFORMATION DESCRIBED IN THIS LETTER ARE COMPLETE OR ADEQUATE
                    OR
                    THAT THEY WOULD BE USEFUL IN SUCCESSFULLY EVALUATING THE COMPANY’S
                    BUSINESS OR STRATEGIC DECISIONS.  CERTAIN INFORMATION AND
                    OPINIONS INCLUDED IN THIS LETTER HAVE BEEN OBTAINED FROM THIRD-PARTY
                    SOURCES BELIEVED TO BE APPROPRIATE FOR CONSIDERATION.  SOURCES
                    FOR SUCH INFORMATION AND OPINIONS MAY HAVE SELF-INTERESTED REASONS
                    FOR
                    PROVIDING INCORRECT INFORMATION.  MOREOVER, NO ASSURANCE CAN BE
                    GIVEN THAT SUCH INFORMATION OR OPINIONS ARE RELIABLE, AND THEY
                    SHOULD NOT
                    BE TAKEN AS SUCH.