Executives
James Green – EVP, Corporate Affairs
Brian Markison – Chairman of the Board, President and CEO
Joseph Squicciarino – CFO
Eric Carter – Chief Science Officer
Stephen Andrzejewski – Chief Commercial Officer
Analysts
Gary Nachman – Leerink Swann & Company
John Newman – Oppenheimer & Co.
Michael Tong – Wachovia Securities
Gregory Gilbert – Bank of America
Ken Trbovich – RBC Capital
Corey Davis – Natixis Bleichroeder
Scott Hirsch – Credit Suisse
Ian Sanderson – Cowen and Company
Shibani Malhotra – Goldman Sachs
King Pharmaceuticals, Inc. (KG) Q4 2008 Earnings Call February 26, 2009 11:00 AM ET
Operator
Good morning. Thank you for joining today’s King Pharmaceuticals fourth quarter 2008 financial results. Please welcome James Green, Executive Vice President of Corporate Affairs of King Pharmaceuticals.
James Green
Good morning ladies and gentlemen. Thank you for joining us today to discuss our financial results for the fourth quarter and year-ended December 31, 2008. Joining me today are Brian Markison, Chairman, President and Chief Executive Officer of King; Joe Squicciarino, King's Chief Financial Officer and other members of our management team.
Initially, I will note that today's call is copyright material of King Pharmaceuticals and no portion of this call may be rebroadcast, published or otherwise disseminated without the company's prior express written consent. Also, reports and discussions during this conference call may contain forward-looking statements that reflect management's current view of future events and operations, including, but not limited to, statements pertaining to expectations regarding our product development pipeline, our plan to maximize the potential of our existing products, our future financial results and our strategy for long-term growth.
Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially. Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in the company's press release issued this morning, February 26th, 2009, and in the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2007, and Form 10-Q for the quarter ended September 30th, 2008, which are on file with the SEC. King does not undertake to publicly update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized.
Under Generally Accepted Accounting Principles, known as GAAP, net earnings and diluted earnings per share include special items. In addition to our financial results determined in accordance with GAAP, King provides its net earnings and diluted earnings per share results excluding special items. These non-GAAP financial measures exclude special items, which our management considers to be those items that do not relate to the company's ongoing underlying business, are non-recurring or are not generally predictable. Examples of these are listed in the About Special Items section of our press release issued this morning.
We believe the identification of special items enhances the analysis of our company's ongoing underlying business and of our company's financial results when comparing results to those of a previous or subsequent like period. However, it should be noted that the determination of whether to classify an item as a special item involves judgments by our management.
The specifics of special items affecting the fourth quarter and year-end 2008 and 2007 and reconciliation of non-GAAP financial measures to GAAP can be found in this morning's press release.
And now, I’d like to turn the call over to Brian Markison, Chairman, President and Chief Executive Officer of King.
Brian Markison
Good morning ladies and gentlemen and thank you for joining us today. Our 2008 accomplishments are substantial and indicative of a continued aggressive execution of the strategy for long term growth that we initiated a few years ago. These accomplishments included the successful acquisition of Alpharma and the submission of four new drug applications to the FDA. Clearly, 2008 was a transformational year for King Pharmaceuticals.
Our acquisition of Alpharma was particularly significant as it strengthens our portfolio and development pipeline of pain management products and increases our capabilities and expertise in this important market. With the addition of the Flector Patch, Embeda and the rest of the development portfolio from Alpharma, we are now better positioned to compete in this market place.
Our enhanced capabilities better positioned us to maximize the potential of our currently promoted products and are especially important to the successful launch of new products as they emerge from our pipeline. This acquisition also provides greater diversification of our business as the addition of Alpharma animal health business will serve as another important source of steady revenue and cash flow. We have made significant progress with our integration initiative and will continue to work diligently to maximize the value of this acquisition.
We are optimistic with respect to the growth potential of Flector Patch, especially since we are just beginning to make in roads into managed care, which should increase patient access to this important product, the only NSAID patch of the market. This will serve as the top priority in 2009 for King’s highly experienced and successful managed care team.
Our hospital team which promotes Thrombin-JMI did an excellent job in 2008 in the face of two new aggressive competitors. As a result of their hard work, Thrombin-JMI with its 14-year track record of safety and efficacy continues to maintain a leading position in a topical hemostat market.
Turning to our development pipeline, we exceed several important advances in 2008. New drug applications for Embeda, Remoxy, and Acurox were submitted to the FDA. These products all utilized unique platform technologies for the development of innovative formulations of opioids that are designed to deter or resist common methods of misuse and abuse.
This last December the FDA issued a complete response letter with respect to the remarks the NDA requiring additional non-clinical data to support (inaudible). We are collaborating with our partner PTI to prepare a response and expect to meet with the FDA during the second quarter. Following this meeting we hope to reach a clear understanding with the FDA regarding the final steps necessary to obtain approval for Remoxy. The NDA for Embeda, the first product developed utilizing a sequestered naltrexone technology was submitted to the FDA in June 2008. Embeda was added to our pipeline as a result of our acquisition of Alpharma. While the FDA did not meet its for due for date for Embeda, we believe the Embeda review is substantially complete and the current issues surrounding the application of a risk evaluation and mitigation strategy had slowed the FDA. We are anxiously awaiting further word from the agency. We also expect to hear soon from the FDA on whether the NDA for Acurox Tablet has been accepted and granted priority review. The NDA for Acurox Tablet was submitted this last December.
Also in December we initiated the Phase 2 clinical trial for T-62, a first in class new chemical entity for neuropathic pain discovered by our research group. Clearly our pipeline includes many opportunities in pain management. Another significant pipeline achievement during 2008 was the submission of the NDA for CorVue, our second generation pharmacologic stress imaging agent that is intended to provide a reduced side effect profile compared to Adenoscan, which was also previously developed by King. We believed this extensive pipeline has the potential to deliver significant value for our shareholders.
Now, I’d like to turn the call over to Joseph Squicciarino, our Chief Financial Officer.
Joseph Squicciarino
Thank you Brian and good morning. I’d like to begin by reminding everyone that since we completed our acquisition of Alpharma on December 29th, 2008. Alpharma’s financial results are excluded from King’s income statement. However, the assets and liabilities of Alpharma are reflected in our 2008 year-end balance sheet. I will, however discuss certain of Alpharma’s fourth quarter and year-end 2008 financial highlights later in the call.
Before reviewing our financial results for the fourth quarter and full year, I’ll provide an update on our capital structure following the acquisition of Alpharma.
Our available domestic cash balance as of December 31, 2008 was $698 million. Of this amount we used approximately $385 million to redeem the outstanding Alpharma convertible debentures earlier this month. As a result of this redemption and cash flow from operations during the first quarter of 2009, our available domestic cash balance as of February 20th was approximately $270 million. Our (inaudible) cash balance was $243 million as of December 31 and was approximately $220 million as of February 20th 2009.
With respect to investments and debt securities, during the fourth quarter of last year, we redeemed through a successful options, $21 million of securities, virtually all of which were backed by student loans. The par value of our investments and debt securities totaled approximately $417 million. Although we continue to see episodic redemptions of these securities, we have classified the substantial majority of this amount in long term asset. Also, we are required to apply also future proceeds from redemptions to reduce debt.
Our total outstanding debt obligations as of year end were $1,410,000. These consist of $425 million drawn under our revolving credit facility, which bears interest at a rate of LIBOR plus 500 basis points. We also have a four year $200 million term loan, which bears interest at LIBOR plus 500 subject to a LIBOR floor of 3%. Key facilities require repayment of principal in the aggregate of $55 million in 2009, $135 million in each of 2010 and 2011, and the balance of $300 million in 2012. However, our intention is to repay this outstanding debt as quickly as possible. The remaining debt as of year end consisted of our $400 million, one in a quarter percent convertible senior notes, which will mature in 2026, and the $385 million of Alpharma convertible notes, which as I mentioned, we redeemed earlier this month.
Now, to discuss our financial results for the fourth quarter and year-end 2008, as I noted previously these results do not include any financial results from Alpharma’s operations. I’d like to highlight that during 2008, we met several key financial goals that we established at the beginning of the year. As a reminder, we expected to generate cash flow from operations in the range of $400 to $450 million for the full year. And we in fact generated $491 million. We expected to reduce our full year SG&A excluding special charges, in the range of $75 to $90 million, and we achieved the reduction of $96 million.
For 2008, our full year gross margin rate was 75% in line with our forecast. With respect to our top line, revenues total $348 million for the fourth quarter and $1.57 billion for the full year 2008. Net revenue from our branded pharmaceutical segments totaled $277 million during the fourth quarter and $1.26 billion for the full year. Our Meridian Auto-Injector business contributed revenue of $53 million during the quarter and $280 million for the full year representing a 19% increase versus 2007. This improved performance was due in part to approximately $35 million in orders we received from the Center for Disease Control. We do not expect this level of CDC orders to repeat in 2009.
Total SG&A expense excluding special items and our co-promotion fee for Altace equaled a $102 million in the fourth quarter and $430 million for the full year. As previously mentioned this represents a decrease of $96 million compared to last year.
Depreciation and amortization excluding special items total $29 million in the fourth quarter and a $148 million for the full year. Research and Development expense excluding in process R&D equaled $34 million during the fourth quarter and a $145 million for the full year. The full year R&D investment included milestones payments to our partners of $28 million.
Moving to earnings per share, for the full year GAAP EPS was a loss of a $1.37 compared to earnings of $1.24 when special items are excluded. GAAP EPS for the fourth quarter was a loss of $2.25 compared to earnings of $0.24 when special items are excluded. The reported loss in 2008 is due to the effect of expensing approximately $593 million for King’s investment in acquired in-process Research and Development. We allocated $590 million of the purchase price we paid to acquire Alpharma to the Research and Development projects that Alpharma had on-going at the time of the acquisition.
Now I’d like to highlight some of Alpharma’s top line results for the fourth quarter and year-end of December 31, 2008. Again, these are not included in King’s financial results for the same period.
The Flector Patch generated net sales of $37 million during the fourth quarter of last year and a $129 million for the full year. However, according to data from our key wholesalers, inventory of Flector Patch was far in excess of King’s normal wholesale inventory level as of the end of fourth quarter. In the first quarter of 2009, we have reduced these levels by approximately $15 million to a level consistent with our other promoted products.
Accordingly, we expect first quarter 2009, Flector Patch net sales to be lower than prescription demand. We anticipate the reported net sales of this product should begin tracking demand during the second quarter of this year.
Animal Health revenues were $89 million for the fourth quarter and $360 million for the full year. This represents a decrease of 2% compared to the full year of 2007. This decrease was driven by the decline of demand for our products as livestock produces cut-back in the face of operating losses caused by record high feed cost.
We have made significant advances in our initiatives relating to the integration of Alpharma. Importantly we have indentified more opportunities for synergies than we originally anticipated. As a result, in 2009 we now expect to capture synergies resulting in net cost savings of approximately $60 million. This savings will come primarily from SG&A and R&D. Beginning in 2010, we expect annual cost savings achieved from synergies to approximate $80 million.
After initiating our integration activities, we received an unfavorable decision from the US District Court in New York ruling invalid two of our three patents relating to Skelaxin. Although this increases the possibility of a generic substitute entering the market earlier than anticipated, we plan to appeal upon the entry of an appropriate judgment and intensive vigorously defend our intellectual property.
In light of the increased uncertainty created by the District Court’s decision, we implemented a restructuring plan to reduce our cost base even further. We have taken these steps to preserve our financial strength and profitability. We expect the savings from the Skelaxin restructuring initiative to result in 2009 cost savings of approximately $90 million. We expect to begin realizing this benefits beginning in the second quarter of this year. However, the cost savings will be partially offset by an estimated special charge of between $50 million and $55 million during the first half of 2009 in connection with this restructuring initiative. These costs are exclusive of any special charges associated with the company’s activities related to the integration of Alpharma.
This restructuring and integration initiatives have resulted in the total work force reduction of 760 positions, consisting of 380 field sales positions and 380 corporate positions. As a result, the company sales force promoting our branded prescription products now totaled 720 and the total company head count is just over 2,600.
With this additional synergies and the restructuring initiative in mind, I would now like to provide some other expectations for 2009.
For the full year, we expect that our gross margin rate will approximate 68%. With respect to SG&A, we estimate that our 2009 spend will range from $560 to $580 million excluding the Altace co-promotion fee. We anticipate that depreciation and amortization will range between $220 and $225 million for the full year. This increase over the prior year is due to the incremental D&A arising from our acquisition of Alpharma and increased amortization of intangible assets related to Skelaxin as we have shortened the life of this asset.
With respect to R&D, we expect that our 2009 investment will be between $100 to $110 million excluding any development milestones we may pay to our partners. We expect to incur net interest expense of approximately $70 million, which includes approximately $18 million of impuded interest relating to the new accounting rules for our outstanding convertible notes. We expect the tax rate of approximately 37%.
Finally, we expect continued strong cash from operations in 2009, specifically given the synergies we expect to achieve and our recent restructuring, we expect cash from operations to range between $375 and $400 million during this year.
Now, I turn the call back over to Brian.
Brian Markison
Thanks Joe. In 2009, we will focus on driving growth in our three main segments, which includes our specialty driven Prescription Pharmaceutical business, our Meridian Auto-Injector business and our newly acquired Global Animal Health business.
At the top of the 2009 priority list is effectively integrating Alpharma. As I mentioned, we are extremely pleased with our progress today. Our fully aligned sales team is focused on maximizing the value of our currently marketed products such as the Flexor Patch, Avinza, and Thrombin-JMI. And most importantly, we will continue to focus on our new term development opportunities as we work to secure regulatory approvals and prepare our commercial organization to successfully launch new products as they emerge from our pipeline.
We continue to believe that the pain management market will shift to formulations that resist or deter common methods of abuse. As a result, we believe our pipeline provide us with significant near term and long term revenue opportunities. Clearly, King is now a stronger, more efficient and competitive company with an enhanced stability to deliver superior value to our stockholders.
Thank you for the opportunity to drive you with the review of our activities in 2008 and a preview of what we planned to accomplish in 2009. Now, I’d like to turn the call back over to the operator for our question and answer session.
Question-and-Answer Session
Operator
Thank you, Mr. Markison. The floor is now open for questions. (Operator’s instructions).
Thank you, our first question comes from Greg Gilbert of Bank of America. You may state your question.
Gregory Gilbert – Bank of America
Thanks, good morning. First, on Brian, any reason to believe that the FDA could act on Embeda before the meeting next month on risk management of opiods or do you see that as a relevant data point as a surprise to Embeda?
Brian Markison
Greg, thank you for the question. Since the meeting is on March 3rd, I’m not quiet sure we’re going to see anything before that date, but I’m hopeful that we’ll see something shortly thereafter.
Gregory Gilbert – Bank of America
But do you think it’s a relevant data point for the review of Embeda, regardless of how little time that exist between now and then?
Brian Markison
Yes, but I really don’t think so because the meeting on March 3rd is really for the currently approved opiods. By having said that I think all of this is related in some fashion but the March 3rd meeting again is really focused on products that are on the market today.
Gregory Gilbert – Bank of America
Okay. Next is for Joe. What is your cash flow guidance for the year assume about Skelaxin?
Joseph Squicciarino
Good question, Greg. We still have it in the forecast for the full year, but given a lower level of promotion that we will be putting behind it. We have taken it down.
Gregory Gilbert – Bank of America
Okay, and should we assume that if it does go generic sooner that you hoped, that there are additional cost cutting initiative or what you laid out today is what we’re going to see for’09 regardless of what happens to Skelaxin?
Joseph Squicciarino
Now, what we shared with you today is what we envisioned under any scenario that would play out relative to Skelaxin as far as cost reduction goes. So we’re not planning anymore if it were to go sooner.
Gregory Gilbert – Bank of America
Okay, thanks. I’ll jump back in.
Operator
Our next question comes from Corey Davis of Natixis. Please state your question.
Corey Davis – Natixis Bleichroeder
Thanks very much. Probably for Joe first. It’s tricky for us to come up with a cash EPS number. So, first question is – Am I correct in assuming that when you report the next several quarters that you’re not going to give us a cash EPS that excludes amortization and excludes that additional expense you cited for the convert accounting?
Joseph Squicciarino
Yes, Corey, how are you? That’s a correct assumption. We’re not going to report cash EPS. We could change our mind on that, but for now we’re going to stay with GAAP EPS.
Corey Davis – Natixis Bleichroeder
So just to help us, because I think that’s probably a more relevant matrix. So for those of us that want to calculate it, what percent of the 220 to 225 in D&A, is D and what is A?
Joseph Squicciarino
Corey, I’m not going to provide that detail now but when we get, if and we get to a point when we start calculating cash EPS we’ll obviously provide that.
Corey Davis – Natixis Bleichroeder
Okay. Last question on this point is – Is that amortization if I do take it out, taxed at the same as the overall corporate tax rate?
Joseph Squicciarino
No, it wouldn't be. As you're probably aware, there are different tax rates that apply there. But, let me come back to the overall concept of cash EPS. As we've discussed it a lot here and we may get to a point some time during 2009 where we may make the change and if we do, we'll provide all those details to you.
Corey Davis – Natixis Bleichroeder
Okay, one last question on Flector. It does sound like AlFarma – and I apologize if they're on the line – did a crummy job with managed care, but as you make progress, is that kind of thing where we won't start to see until the end of the year or could that occur sooner than that and how much decrement would you expect in the gross to net margin as a result of the new contracting?
Brian Markison
Corey, let me turn that over to Steve Andrzejewski for a little more color commentary on Flector.
Stephen Andrzejewski
Hi, Corey. In terms of managed care, we definitely see it as an upside opportunity for Flector. We were successful at getting a second tier status in ESI Express Scripts' Book of Business recently. However, many of these, as you know, based on benefit designs, do go in six month increments; so, either July 1st or more likely the beginning of the following year. In terms of gross to net at this stage we still don't provide details around that.
Corey Davis – Natixis Bleichroeder
That's very helpful anyway. Thanks, guys.
Operator
Our next question comes from Scott Hirsch of Credit Suisse. Please state your question.
Scott Hirsch – Credit Suisse
Hi, there. Can you guys give us a little qualitative directional color on the animal health market? It's hard for us to model it. Do you have any insights directional that you can help us with?
Brian Markison
Sure, we'd be happy to delve through that, Joe.
Joseph Squicciarino
Good morning, Scott. It was a tough year for the animal health business in relative terms and what we experienced – and this is not new news – is that an increase in the input cost for that business certainly had an adverse impact on margins. Some of our competitors, when they released their results, showed a similar outcome for the full year. But having said all of that, we're partnering very closely with all of our customers. We continue to be maniacal about our costs and what we can do to reduce them.
But it would be hard for me to give a prediction as to what's going to happen in the overall economy, which obviously, has a direct impact on this business. But, nevertheless, it is still a strong, steady generator of cash flow and an integral part of our overall business.
Brian Markison
Scott, we are not planning for over-year-over growth for this business. When you look at 2009, compared to 2008.
Scott Hirsch – Credit Suisse
Okay and I know AlFarma had indicated that they were going to leverage some of their balance sheet strength to be investing in this business, perhaps in Latin America. I know that they'd acquired someone in China. Are there any plans for investing in animal health going forwards?
Brian Markison
Yeah, we're very interested in investing in this business and strengthening it, especially in the emerging markets – like you mentioned – certainly Latin America. But, we're going to take a look at all of these opportunities as they come to us and balance them for the appropriate level of return on investment that we're expecting to deliver to our shareholders. So, yes, we're absolutely interested, but B, we're going to look at it as a total portfolio as well as the other priorities in the company.
Scott Hirsch – Credit Suisse
On Thrombin, we saw – as I think you mentioned – a little bit lighter this quarter. Is there something you guys have planned for hospital purchasing patterns or is competition just coming up here?
Brian Markison
Well, yeah this quarter – meaning the fourth quarter of 2008 – we are planning to promote Thrombin like we have been and we will continue to fight it out with the competition on a hospital by hospital basis and we plan to be very, very competitive.
Scott Hirsch – Credit Suisse
And you can do that via pricing?
Brian Markison
We can do that through all of the tools that are available to the company: promotion, education. As you can expect, we do not want to lose volume. And we think we have the cost advantage here in terms of being fully integrated in manufacturing. So, we've been in this business for a long time and we plan to stay in.
Scott Hirsch – Credit Suisse
Okay and then, just lastly, on Embetta – outside of the things that aren't in your control, meaning the approval and some of the REMS requirements – can you talk about the launch strategy, now that it's not going to be a switch with Kadian, how do you see the market with Avinza?
Brian Markison
Yeah, I really do not want to comment too much on whether it would be a switch for Kadian or not. I think what we're looking to do is introduce – hopefully – the first product into the market that will be a long-acting opioid that will have, basically, abuse-deterrent features to it and this all remains to be clarified through labeling. And we think this will be a very, very big player in the morphine space and I think it will go a bit beyond morphine as well.
I think it's bio--equivalent to Kadian and how it performs, so clearly, there's a great opportunity to take Kadian business, but we're going to come at this product more broadly than that and not strictly focus on taking business from Kadian.
Scott Hirsch – Credit Suisse
Okay, thanks very much.
Operator
Our next question comes from Ian Sanderson of Cowen. Please state your question.
Ian Sanderson – Cowen and Company
Good morning, thanks for taking the question. The 90 million of restructuring savings that start in Q2 of '09, should we assume those savings annualized to 120 million in 2010?
Brian Markison
At or about that level, Ian.
Ian Sanderson – Cowen and Company
Okay and secondly, on your SG&A and R&D guidance numbers, what have you assumed in terms of Embetta and or Remoxy launch spending? Are those fully dialed in to the 2009 numbers are should those get approved in the first half of the year? Would those guidance numbers be increasing?
Joseph Squicciarino
Good question, Ian. We have provided some level of support behind both of those products in our 2009 plan. However, when we do receive approval, we will probably dial it up beyond the levels that we've assumed and that's why I gave a range for SG&A.
Ian Sanderson – Cowen and Company
Okay and similarly, on the sale force, would you be contemplating sale force expansion with early approval of either of those?
Brian Markison
Well, right now, Ian we are – we think – appropriately sized for the products that we're currently promoting and we're anticipating or planning for the launch of Embetta. I think as other products get approved later on, we're going to evaluate it at that time for the optimal reach and frequency that we need for each of these products, but our current configuration is perfect for what we're planning right now and again, we're going to constantly re-evaluate it.
Ian Sanderson – Cowen and Company
Okay and then final question on Acurox, has anything been done in terms of putting together a REMS proposal for Acurox?
Brian Markison
All right, I'm going to turn this one to Eric Carter.
Eric Carter
Yeah, hi there. I'm Eric Carter, CSO. Obviously we're working to ensure that we appropriately manage the risks associated with Acurox. What form that will take I think time will tell. But, our first priority is to make sure that those risks are appropriately managed.
Ian Sanderson – Cowen and Company
Thank you.
Operator
Our next question comes from Shibani Malhorta from Goldman Sachs. Please state your question.
Shibani Malhotra – Goldman Sachs
Hi, guys, thanks for taking my question. I just wanted to go back to Greg's question on the Embetta REMS panel meeting that you have on Monday. I know you said this was only for approved products, but I assume that you will be participating, so correct me if I'm wrong. And then can you just help us think about what is happening on a broader level with the SPA and their focus on the REMS issue and what your expectations are for what that means for the abuse deterrent or tamper resistant market and how we should be thinking about that as an opportunity or a negative for your products such as Embetta and Remoxy?
Brian Markison
Yeah, thank you for the bunch of questions. I think, ultimately, we think this is going to be very, very positive for our pipeline, which is why we're so committed to it because clearly, there's a heightening of awareness and the need to intervene with all of these long-acting opioids and we think, ultimately it's going to be very positive for our company.
As to what's happening now in the industry and with the agency, I think it's an evolving situation and regrettably, I can't really give you any more clarity than what you're reading. I think the FDA has been quoted in the pink sheet and they've given as much color commentary as they're prepared to give and we're just working with them to try to get through this phase and make sure we come out with a solution that's good for physicians, patients and the industry and also something that the agency could live with, which doesn’t unduly burdensome in this environment. I think also Dr. Carter would like to add to this.
Eric Carter
Yes. I mean, obviously we'll recognize the public health problems that we're trying to address here, and we're very much committed to insuring that we're playing an important part in addressing this public health issue, and we think that these platforms that we're developing with ACUROX, with Embeda, and with REMOXY, that can play a really important part in this role to insure that the benefits of our medicines exceed the risks, which is precisely what is in the interest of FDA, ourselves, the public health society generally.
Shibani Malhotra – Goldman Sachs
Okay. But just to clarify, are you still expecting an Embeda approval in 2009, or should we be thinking that this is a much larger issue and it could go out to 2010.
Brian Markison
Well, as we're sitting here today, we're planning on a 2009 approval.
Shibani Malhotra – Goldman Sachs
Okay. All right. Thank you.
Brian Markison
Thanks.
Operator
Our next question comes from Gary Nachman of Leerink Swann. Please state your question.
Gary Nachman – Leerink Swann & Company
Hi. Good morning. First, Brian, just another one on Embeda. In your dialogue with the FDA, how confident are you that it's really just about the REMS at this point and that it's not related to the label in any way?
Brian Markison
Well, until the product is approved it's always subject to change, and I'll just say what I've said before and I really can't say more than this at this time, and that is we believe that the issue surrounding REMS are primarily what is holding up Embeda. And again, we're very anxious to continue working with the agency for a solution that we can hopefully help pave the way with.
Gary Nachman – Leerink Swann & Company
Okay. But at this point do you feel confident in the label that's been drafted, that you guys are pretty close to agreement there?
Brian Markison
What we've seen thus far we've very comfortable with, we're excited about, and we just really want the opportunity to bring this product to patients and physicians.
Gary Nachman – Leerink Swann & Company
Okay. And then after the restructuring, what is the makeup of the remaining sales force and which products are you detailing? Can you just tell us how it's configured right now? And then if Embeda got approved tomorrow, it sounds like the sales force is still appropriately sized at how that would fit in?
Brian Markison
Number one, yes, the sales force is appropriately sized, and has already received a fair amount of training on Embeda, and they're basically ready to go.
Secondly, what we're looking at is a total team of 720, roughly 100 in the hospital, 400 plus in what we're calling our specialty team, and then 140 plus in our pain team, which focuses on the highest prescribing pain specialists.
Gary Nachman – Leerink Swann & Company
Okay. So then with Embeda, should we assume that it would be all these reps detailing it, or at a minimum the pain and the specialty reps?"
Brian Markison
The pain and the specialty team will. The hospital team probably won't in the beginning anyway, and the hospital team is going to start to promote Flector in the emergency rooms. So, we think there's the potential for some sales there.
Gary Nachman – Leerink Swann & Company
Okay. And then a couple for Joe. Could you talk a little bit more about the strategy for paying down debt, and would you potentially use cash for share buyback or M&A, or are you just going to be more aggressive about paying down the debt at this point of the cash flow?
Joseph Squicciarino
Good morning, Gary. All good questions. We're going to be as aggressive as possible as we can to pay down the new debt that we took on to acquire Alpharma. We obviously have a pretty detailed plan internally, but I'm not going to print out a detailed forecast, except to say that maybe with a little luck, we'll be able to have all of this debt paid off sometime by the end of 2010.
And as far as share buyback, that's a question that we get quite often. What we're most interested in doing is to the extent we have available resources, we're going to plough them back into the business in the form of business development opportunities, whether it be in licensing or acquisitions.
Brian Markison
Gary, it's all related, right? We pay down the debt as fast as we can, it frees us up to do a lot more transactions.
Gary Nachman – Leerink Swann & Company
Okay. That's helpful. And then lastly, Joe, could you tell us what the operating margin was for animal health in the fourth quarter? I think that will help us think about 2009 a little bit better. Thanks.
Joseph Squicciarino
We typically don't disclose that level of detail, but let me say that we continue to see an erosion at the gross margin level throughout the year. In fact, each quarter there was a decline and so what I'll share with you is that the gross profit margin in the fourth quarter was a little bit north of 45%.
And that obviously plays into why our overall gross margin, as ac company, will decline in 2009.
Gary Nachman – Leerink Swann & Company
Okay. But the operating margin was down sequentially in 4Q from 3Q by that business?
Joseph Squicciarino
Yes.
Gary Nachman – Leerink Swann & Company
Okay. Thanks.
Joseph Squicciarino
You're welcome.
Operator
Our next question comes from John Newman of Oppenheimer. Please state your question.
John Newman – Oppenheimer & Co.
Thanks for taking the question. On REMOXY, have you got any indication that the FDA may be looking for likeability data, and also, do you have any idea when we might see the REMOXY patent become available? Thanks.
Brian Markison
The REMOXY patent question I can't answer at this time, only because I just don't know the answer, and no one in the room knows the answer just at this moment, but we certainly touch that down for you. And again, that would be a prediction of when something would be published, so it probably wouldn't be a very sticky answer anyway.
With regard to likeability and the agency, I think we are planning to do more clinical trials with REMOXY. The difficulty here is it's not like we're adding a pharmacologic agent like naltrexone in the case of Embeda. What we're devising with REMOXY is just a product that on the whole is much more difficult to break up the matrix and extract the opioid and achieve that rapid rise in blood levels.
So, if we do more research with REMOXY in the clinic, it will be unrelated to the complete response letter that we did receive at the end of 2008. It's strictly because we want to do the work and we believe it would be useful for the education and promotion later on.
John Newman – Oppenheimer & Co.
And just one quick follow up, different topic. On the animal health business, would there be a point in time, perhaps this year or next year, where you would consider divesting the business?
Brian Markison
Well, we could answer that question a lot, and I think right now we're very interested in keeping that business. Certainly it adds a layer of diversification and enriched cash flow to the company, which we certainly can use. And it's a great way to buoy the patent cliffs that we see in a small company like ours, with the portfolio that we have.
So, that doesn't mean that we're not going to be responsive to shareholder value if a great offer comes along, but right now we're not planning to sell that business in the very immediate future.
John Newman – Oppenheimer & Co.
Great. Thank you.
Operator
Our next questions comes from Michael Tong of Wachovia Securities. Please state your question.
Michael Tong – Wachovia Securities
Hi, thanks. I just want to clarify a couple of responses to the earlier questions. Brian, when you talked about the sales force configuration, can you repeat that structure, because I seem to come up with 640 reps instead of 720.
Brian Markison
Right. In the 720 number we also include management. So, the precise number of reps is 649.
Michael Tong – Wachovia Securities
Okay. And then second one for Joe, you talked about SG&A having considered potential approval of Embeda, and I want to make sure that you said that should Embeda get approved and you decide to launch it, that you will tend towards the high end of your guidance range, but still within the guidance range for SG&A?
Brian Markison
Yeah, and by the way – it's Brian still, if Embeda does get approved, we will launch it. So, (laughs) – but you just quoted is what Joe said.
Joseph Squicciarino
Yeah. Let me just elaborate a little, Michael. Recognizing that nothing is ever carved in stone as far as the level of resources that you have to devote to an exciting launch such as Embeda, but yes, the range that I gave of 560 to 580 is a range that we're comfortable with. If subsequent to the launch of Embeda we come to the conclusion that by enhancing the level of resources behind us that there will be a benefit for that, we will obviously do that.
Michael Tong – Wachovia Securities
Okay. And then finally, on Flector, other than managed care contracting, what other steps are you undertaking to accelerate prescriptions which seem to have flattened since October.
Stephen Andrzejewski
Yeah. This is Steve Andrzejewski. We've very excited about the Flector Patch opportunity. It competes in a market of over 80 million scripts and as everyone knows, we went through a lot of change very recently with the purchase of Alpharma and then our downsizing and reconfiguration of our sales force, as in retraining of our sales forces – that all has occurred over the last couple of months, and as a result we are slightly down about 8% from our weekly peek scripts on Flector.
We feel very confident though, moving forward – now that our team is in place and well trained that we'll certainly reverse and trend back to a similar trend and hopefully even better than what you saw in 2008.
I can also just reiterate what Brian said that our hospital team will be selling Flector Patch in the emergency department, where approximately 10% of patients that present there, present with a sprain, strain, or contusion, which is the indication for Flector Patch.
Michael Tong – Wachovia Securities
Thanks very much.
Operator
Our next question comes from Greg Gilbert of Bank of America. Please state your question.
Gregory Gilbert – Bank of America
A couple of quick follow ups. First, Joe, did I hear correctly, or can I ask you if you plan to break out profitability for Animal Health going forward on a quarterly basis?
Joseph Squicciarino
Yeah, Greg. I'm not sure that we're going to be breaking that out going forward. If there's a real need for a significant change in the business one way or the other, we'll contemplate doing that, but right now it's not something that we're planning on.
Gregory Gilbert – Bank of America
Okay. Brian, is the Animal Health management team intact, and is the day-to-day strategy pretty much intact as well other than what was said about resources going forward?
Brian Markison
The entire management team at Animal Health is intact. We're working very carefully with Carol, on a succession candidate to her. That is in place. Because I think after seven years in Animal Health, she'd like to move on with her career and do some other things, but there's no immediate timeframe for her to leave, and like I said, her successor is in place. And her entire team is in place and functioning well and they continue to just do a great job.
Gregory Gilbert – Bank of America
And lastly, Brian, what's the latest on Alpharma's oxycodone formulation that they were working on, the abuse deterrent one.
Brian Markison
Well, the latest is that I don't believe that those formulations were as far along as they might have reported last year, however, we are excited about them and we are working on them right now, especially the Oxycontin NT, which they reported. And we think there's a fair amount of potential for a lot of approaches to this abuse deterrent opportunity.
Gregory Gilbert – Bank of America
So that is not a Phase III ready type of program at this point?
Brian Markison
No, and it wasn't last year either.
Gregory Gilbert – Bank of America
Okay. Thanks.
Operator
Our next question comes from Ken Trbovich of RBC Capital. Please state your question.
Ken Trbovich – RBC Capital
Thanks for taking the question. I guess obviously you've expressed quite a bit of confidence around the potential for Embeda this year. I was wondering, between ACUROX and REMOXY, which do you have the most comfort with, with regard to agency reaction or interaction at this point?
Brian Markison
Well, I think they're both the same. I think right now we're optimistic about REMOXY and the way we're handling the complete response letter and our plan to meet with the agency in the second quarter. And I think with regard to ACUROX it's quite an elegant product and it'll be the first one out in short-acting opioid space and we're equally optimistic about that as well.
So, we think we've got two good ones here and it'll be a nice follow up to Embeda.
Ken Trbovich – RBC Capital
Okay. And then with regard to partnership opportunities, could you give us a sense as to the positioning of CorVue or Vanquix and how confident you may be in the ability to attract partners for those products?
Brian Markison
Well, we've had a lot of interest in CorVue, and I think we're just trying to meter out the pace at which we want to go here. Vanquix as well, a lot of interest, and again, we're trying to decide do we promote it ourselves or do we partner it? I think CorVue would probably benefit from a strong partner before Vanquix. Vanquix we may decide to hang onto, but both of those are proceeding in our process and have multiple partner opportunities that we're evaluating.
Ken Trbovich – RBC Capital
Okay. And final question, I guess more for Eric. On the R&D pipeline given the budget, what are the priorities of the combined organization? Certainly Alpharma had some hopes to advance the ketoprofen and the Elodur patch. If you could give us a sense as to where the research priorities lay now that you've had the chance to look in greater details at all the programs.
Eric Carter
Yeah, Ken. Thanks, great question. And indeed we have spent a fair amount of time in looking at the overall integrated portfolio and reprioritizing it. Our first goal clearly is to get NDAs that we submitted last year, to get them approved, and those products launched. And then we do have a number of other exciting opportunities to pursue.
We've made some changes to the pipeline in terms of the way that we're prioritizing and the way that we're resourcing projects, but I think overall if you look at the overall balance of the portfolio, it actually looks pretty exciting and I think that we've got the appropriate resources to progress this in a expedient way.
Brian Markison
I think if you look at our priorities and this would not necessarily be sequentially, but how we're looking at it, clearly we have three platform technologies that address the misuse and abuse of opioids in different ways. There's the Acura portfolio, there's the Elodur which is the REMOXY partnered product with Pain Therapeutics, and then there's the NT portfolio where Embeda is obviously the flagship. And then next up we have ketoprofen and transfer some gel (ph) which is in Phase III and we're awaiting those results.
It's a little bit of a different market than it was two years ago before Endo launched the Voltaren Gel, and we're anxious to see how this market pans out. And Elodur, which is the bupivacaine patch that we're partnered with direct, is really very, very interesting to us, and we're hopeful that we can spend a lot of time and energy on that product, bringing it to market.
So again, platform technologies, three different abuse deterrent or aversion approaches here. Picking up our topical portfolio as well, hopefully there will be a build out to the Flector line, ketoprofen gel and Elodur, and we think we have quite an exciting portfolio.
Eric Carter
And let's not forget T62 which is also in proof of concept for neuropathic pain which is essentially a very large opportunity going forward.
Ken Trbovich – RBC Capital
So just to clarify, the timing around the approach to some of the trials may have changed, but it doesn't sound like any of the programs have been terminated or set aside.
Eric Carter
Not the key programs that we've just described, correct.
Ken Trbovich – RBC Capital
Okay. Thank you.
Operator
(Operator's instructions) Thank you. With no further questions, I'd like to turn the floor back over to Mr. Green.
James E. Green
Thank you for joining our conference call today. We appreciate your interest in King Pharmaceuticals and look forward to speaking with you again when we report our financial results for the first quarter. Thank you and have a good day.
Operator
Thank you. This does conclude today's teleconference. We thank you for your participation. (Operator's instructions) and have a great day.
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