King Pharmaceuticals Inc., Q1 2009 Earnings Call Transcript

| About: King Pharmaceuticals (KG)

King Pharmaceuticals Inc. (KG) Q1 2009 Earnings Call May 11, 2009 1:00 PM ET

Executives

Brian A. Markison - Chairman, Chief Executive Officer, President

Joseph Squicciarino - Chief Financial Officer

Stephen J. Andrzejewski - Head, Commercial Operations

David E. Robinson - Vice President of Investor Relations

Analysts

Corey Davis - Natixis Bleichroeder

Louise Chen - Collins Stewart

Gary Nachman - Leerink Swann

David Buck - Buckingham Research Group

Ian Sanderson - Cowen & Co.

Elliot Wilbur - Needham & Co.

Gregory Gilbert - Bank of America

Scott Hirsch - Credit Suisse

Michael Tong - Wachovia Capital Markets

Robert Hazlett - BMO Capital Markets

John Newman - Oppenheimer & Co.

Operator

Good morning. Thank you for joining today’s King Pharmaceuticals’ first quarter 2009 financial results. Please welcome David Robinson, Vice President of Investor Relations of King Pharmaceuticals.

David E. Robinson

Good afternoon ladies and gentlemen. Thank you for joining us today to discuss our financial results for the first quarter ended March 31, 2009. Joining me today are Brian Markison, Chairman, President and Chief Executive Officer of King Pharmaceuticals; Joe Squicciarino, King Pharmaceuticals’ 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, May 11, 2009, and in the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2008, which is 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.

In addition to our financial results determined in accordance with Generally Accepted Accounting Principals known as GAAP, King provides adjusted net earnings and adjusted diluted earnings per share results. These non-GAAP financial measures exclude the effect of amortization of intangible assets and imputed interest expense associated with the company’s $400 million Convertible Senior Notes in addition to those special 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 Adjusted Financial Results section of our press release issued this morning.

We believe that providing adjusted financial results enhances the analysis of our company's ongoing underlying business when comparing results to those of a previous or subsequent like period. However, it should be noted that the determination of whether to exclude an item from adjusted financial result involves judgments by the team of management.

A reconciliation of the team’s adjusted financial results to reported financial results determined in accordance with GAAP for the quarters ended March 31, 2009 and 2008 can be found in this morning's press release.

Now, I will turn the call over to Brian Markison, Chairman, President and Chief Executive Officer of King Pharmaceuticals.

Brian A. Markison

Good afternoon ladies and gentlemen and thank you for joining us today.

During the first quarter we continued to advance our pipeline and focused on gaining regulatory approvals for our four products that are currently under review by the FDA. Most notably, we moved culture to an approval of the new drug application for EMBEDA, our long-acting morphine and altrexone formulation that is designed to deter common forms of misuse and abuse. Specifically, the company received feedback from the FDA regarding a risk evaluation and mitigation strategy for EMBEDA, and we are in discussions with the agency in what we view as the final step towards approval.

With respect to the FDA’s request to the industry to develop a class of REMS from long-acting opioids, we helped launch the process and we continue to participate in meetings with the other sponsored companies. Although it is too early in the process to provide an expected time-line for the completion of the project, the sponsored companies are working toward a common goal.

We are also eagerly anticipating the approaching June 30, 2009, PDUFA date for the FDA’s review of the NDA for ACUROX Tablets, a short-acting oxycodone product that we are developing with Acura Pharmaceuticals. They saw our discussions with the FDA, and we currently do not anticipate an advisory committee meeting or that of REMS for ACUROX will be necessary.

During the first quarter, King Pharmaceuticals assumed full control from pain therapeutics of all activities related to the development of REMOXY, a long-acting oxycodone formulation that is designed to also deter common forms of misuse and abuse. As a result of the transition, we have set a new date with the FDA to discuss our planned responses to the complete response letter. We now expect this meeting to occur in the first half of July. We are confident that this new date will not delay our re-submission.

Turning to other pain management opportunities in development, we expect to review Phase 3 results for our ketoprofen and trans-system gel product over the next 2 months. In collaboration with Durect, we are finalizing the development plans for the ELADUR bupivacaine patch and expect to initiate related activities later this year.

Recently, we stopped dosing patients in our proof of concept clinical trial of T-62 for neuropathic pain due to the transient elevation of liver enzymes in some trial participants. We are continuing to monitor the trial participants and assess the data obtained from the study and we’ll provide an update on the next steps following our review.

With respect to pipeline advances outside of our pain franchise, during the first quarter the FDA provided us with a PDUFA action date of October 8th for its review of the NDA for core view, our second generation pharmacologic stress imaging agent. Also, an FDA advisory committee is scheduled to discuss core view on July 28th.

We remain excited about our late stage pipeline and importantly the potential of our novel opioid formulations and products that are designed to reduce the risk of misuse and abuse commonly associated with existing prescription medicines. Most importantly, following the re-alignment of our sales team earlier this year, we are well prepared to effectively launch these new products as they emerge from our pipeline.

Now, for a review of our financial results, I will turn the call over Joe Squicciarino, our Chief Financial Officer.

Joseph Squicciarino

Good afternoon. I’d like to begin by noting that in the first quarter of 2009 we will of course report GAAP financial results and adjusted financial results. The adjusted financial results will continue to exclude special items as in the past as well as the effect of the amortization of intangible assets and imputed interest expense associated with the change in accounting treatment of over $400 million Convertible Senior Notes. This change is consistent with the reporting of many of our peers.

I would also like to remind everyone that since we completed our acquisition of Alpharma on December 29, 2008, Alpharma’s financial results were excluded from King Pharmaceuticals’ first quarter 2008 results. With respect for our acquisition of Alpharma, during the first quarter we substantially completed our integration initiatives and worked diligently to identify and capture synergies. Also, I would like to note that we are very pleased to be working with our new colleagues and believe it has been a smooth transition.

Now, for a review of our first quarter financial results: Total revenues for the first quarter totaled $429 million. Net revenue from our branded pharmaceutical segment totaled $278 million. With respect to our branded pharmaceutical segment, I’d like to highlight the improvement in prescription trends for the FLECTOR PATCH.

Although we experienced a slight decrease in prescriptions following the closing of our acquisition of Alpharma, according to IMS data, monthly FLECTOR PATCH total prescriptions reached an all-time high in March. As we exercised our focus on managed care opportunities for the patch, we continued to be optimistic with respect to the growth potential for this product. However, as I noted on our year-end call, wholesale inventory of FLECTOR PATCH was far in excess of King Pharmaceuticals’ normal level as of the end of the fourth quarter. Accordingly, in the first quarter of 2009, we reduced wholesale inventory to a level consistent with our other promoted drugs. We anticipate that beginning with the second quarter of this year, net sales of the FLECTOR PATCH will more closely track demand.

Net sales of THROMBIN-JMI were $47 million in the first quarter of this year compared to $67 million last year. The decline in that sale was primarily due to a higher level of discounting and the decrease in the number of units sold.

SKELAXIN sales in the first quarter totaled $101 million compared to $116 million last year. The decline is due in part to our decrease in promotional activities behind the brand.

Total revenues during the first quarter include $80 million from our Animal Health business. Animal Health revenues continue to be adversely affected by a decline in demand for our products as the livestock produces cut-back in the face of operating losses with lessening demand for their products. As we previously forecasted, we do not expect growth for the Animal Health business this year.

Our Meridian Auto-Injector business recorded revenue of $57 million in the first quarter compared to $43 million last year. This increase was driven primarily by government orders.

ADENOSCAN royalty totaled $15 million in the first quarter compared to $19 million last year.

Our gross margin excluding special items was approximately 70% in the first quarter. Although our margin this quarter exceeds our full-year forecast, we continued to expect a gross margin of 68% for the full year. Total selling, general, and administrative expenses excluding special items and our co-promotion fee for ALTACE was $137 million in the first quarter of 2009. We expect SG&A expense to increase in the next 3 quarters as compared to this quarter, and we continue to expect full year SG&A of $560 million to $580 million for the full year.

Excluding special items, depreciation totaled $14 million in the first quarter compared to $8 million last year. Research and development expense equaled $27 million during the first quarter, virtually flat versus last year. Our effective tax rate for the first quarter excluding certain non-GAAP recurring adjustments and special items was approximately 37%.

Moving to earnings per share, for the first quarter we reported GAAP loss of $0.04 per share compared to earnings of $0.26 per share excluding certain non-GAAP recurring adjustments and special items. This difference was primarily driven by a charge of $48 million related to our previously announced restructuring, amortization of intangible assets totaling $38 million, and the charge of $22 million related to a step-up in inventory associated with the acquisition of Alpharma.

As of March 31, 2009, our unrestricted domestic cash balance was $209 million and our ex-US cash balance was $228 million. Cash from continuing operations for the first quarter totaled $17 million. We continue to forecast full year cash from operations of $375 million to $400 million.

In addition to redeeming Alpharma’s convertible debentures for $385 million during the first quarter, we made payments totaling $48 million on our outstanding debt. This represents $33 million in excess of that required by our repayment schedule. As a result, the face value of our total outstanding debt as of March 31, 2009, was $977 million.

With respect to investment in debt securities during the first quarter, we redeemed through successful options $8 million of securities. As a result, the par value of our investment in debt securities totaled approximately $409 million as of the end of the first quarter.

Now, I’d like to turn the call back over to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Corey Davis - Natixis Bleichroeder.

Corey Davis - Natixis Bleichroeder

First for Brian, can you give us an update or at least any clarification you might have received from the FDA in recent discussions, what shape that REMS program might take?

Brian A. Markison

What’s the second question?

Corey Davis - Natixis Bleichroeder

Yes, more for Joe, if you’re going to keep your full year SG&A guidance but just reported $548 million run rate without any synergies, I’m assuming that you’re assuming a pretty big ramp in spending for EMBEDA and ACUROX, so one, is that correct, and second, should Q2 start to see those expenses and be up sequentially over Q1?

Brian A. Markison

Corey, I’ll take the REMS question first; the best way to describe the REMS is we’re in a dialogue now with the agency, and again we think it’s a very positive move forward for us and I think the best way to describe it at this time is to say that it’s not unduly burdensome for the company, and while we’re still finishing up some of the elephants and what it will look like, again, it’s something that we are well prepared to live with; I think it’s the best way to describe it, and Joe will take the second half of the question.

Joseph Squicciarino

First, we will see a ramp in spending as the year progresses but not as much as you might think and I will come back to that in a moment. We’re still holding to our range of $560 million to $580 million; we will come in if all things go according to plan at the higher end of that range. So, to frame this for you, to put it in perspective, if you start with the $560 million to $580 million range of spend for SG&A, that already includes $60 million of savings from integration as well as the $90 million of savings from restructuring, and I guess the best way to describe it is last year 2008, the total SG&A number was $413 million, so if you work that delta over that variance off of the range, you’re looking at an increase of $147 million to $167 million, and the Animal Health business comprises approximately $80 million of that increase. We have 100 more references this year than we did last year, so that’s about another $20 million, and then between the acquired products, specifically FLECTOR and now getting back to your point as well as the amounts that we’ve allocated for the launch of the new product EMBEDA and ACUROX, that will come in at about an increase year-on-year of about 40, and of course there’s inflation on the cost base which is about $20 million; so, those four items represent an increase of about $160 million which sets you back to the increase year-on-year of the $147 million to $167 million of the range of guidance that I gave earlier.

Operator

Our next question comes from Louise Chen - Collins Stewart.

Louise Chen - Collins Stewart

I just have two questions here; first, on the gross margin, I know that you said it’s going to go back to the level that you set for the year, can you just explain why it was higher this quarter and then what’s going to drive it back to the normalized range you talked about, and then secondly, on Meridian, can you talk about why the sales were so strong this quarter and is that a good run rate going forward for that business?

Joseph Squicciarino

As far as the Meridian sales go, as I mentioned in the prepared remarks, the single largest driver, in fact it was the vast majority of the favorability, was due to government sales, and unfortunately, we are not in a position where we can predict the orders of levels that we receive from the government, and as hopefully you can appreciate, we also respect the government’s wishes not to describe and provide a lot of details around those sales to the government. Is it sustainable going forward? We hope so, but certainly we’re not planning for that. As far as gross profit goes, during the first quarter of this year we had a benefit due to lower rate of royalty that we pay on AVINZA and we also had a price benefit, and then there are some mix issues that caused us to come in at the 70% level. As we just prepared our updated forecast for the year, we’re still going to come in at the level of guidance that we had given at the beginning of the year at around 68%.

Operator

Our next question comes from Gary Nachman - Leerink Swann.

Gary Nachman - Leerink Swann

First, a followup on EMBEDA, Brian, do you think it makes sense for the FDA to wait until after the panel later this month before approving EMBEDA, do you think they could do it before then, and what are your expectations now going into that panel in terms of what the focus is going to be?

Brian A. Markison

I think, number one, you need to disassociate EMBEDA from the upcoming panel meeting because I don’t really think the two are related in any respect. I think what’s very clear is the agency gave us very good recommendations and guidance for what needs to be incorporated into our REMS for EMBEDA and it’s also very clear that when the final class REMS is in place, King will have to modify its current REMS and resubmit to the agency and basically confirm, and naturally we’re committed to do that. So, I think the upcoming meeting, the public hearing is really more of an opportunity for the agency to take care of lot of feedback on what they are proposing with regard to the REMS and I would really disassociate that from what we’re actually going through ourselves which are discreet activities. We’ll be at that meeting as well as many of the other industry members and we’re certainly prepared to talk at the meeting as well.

Gary Nachman - Leerink Swann

So, you don’t think that they would need to see that feedback before implementing your REMS because they’re far enough along than what they’re comfortable with.

Brian A. Markison

We have received very concrete and good recommendations from the agency as to what they would like to see in our REMS for EMBEDA. We had a followup call with them where we went through the elements that we had questions about and there are no real big ticket items here, just clarifications for our purposes, and we’re assembling all response right now and we’ll have it in shortly. Again, I think the public meeting is a two-day opportunity for many different kinds of sponsors, etc., to let the FDA know what it needs to hear on the matter and meanwhile we’re proceeding with the REMS that we’re comfortable with and the agency is comfortable with as well.

Gary Nachman - Leerink Swann

One for Joe, what’s a good price that we should be using for FLECTOR now that you’re seeing better uptake in managed care; has there been a little bit more pricing pressure, and how should we think about that trend throughout the year?

Joseph Squicciarino

It’s a good question and one that I know that had been answered in the past. As you know, the level of contracts and the number of contracts that had been put in place by Alpharma were not that great. We have since become very active in the managed care arena with FLECTOR. For competitive reasons we’re really not going to disclose the average price per script except to say that it will be going down as we gain acceptance and we get on more formularies as the year goes on.

Gary Nachman - Leerink Swann

What are magnitudes, is that very significant or just modest?

Brian A. Markison

Gary, we’re in active negotiations with a number of plants right now and right after the acquisition and integration we got a few really good early REMS and I think we want to hold a little buffer here and not give up a lot of margin on this brand. So, we’re gaining it as we go, but clearly we have some good opportunities in front of us with managed care. We are making progress. We’re very comfortable where we are and the exciting thing about FLECTOR is in the monthlies we get an all-time high and then this week on TRx’s, we get a weekly all-time high. So, I think we’re making a lot of progress here.

Operator

Our next question comes from David Buck - Buckingham Research Group.

David Buck - Buckingham Research Group

A couple for Joe on FLECTOR and THROMBIN-JMI; first on FLECTOR, can you give some level of detail on what the inventory draw-down was; was it in fact $15 million and were there any real managed care wins in the current quarter or is there more to come. Secondly, on THROMBIN-JMI, we had previously seen a fairly close relationship with the IMS reported sales and that seems to have gone down. Was there anything in the quarter that led to that, any inventory destocking. For Brian, just a quick one on REMOXY; can you talk a little bit about your preparation for the meeting in terms of what you’re able to do before you in fact meet with the agency?

Brian A. Markison

I’ll start with REMOXY; all progress in getting ready to meet with the agency is really pretty much on tract. Nothing totally new to tell you except we’re feeling very good about how we’re assembling all the information we need to have a great meeting with the agency, and certainly when we come out of that meeting, we’ll have a better chance to give the street some direction as to when we will be submitting to the NDA; the complete response letter. With that, we’ll bounce back up to your FLECTOR question for Joe.

Joseph Squicciarino

David, as far as FLECTOR inventory levels go, I think in the Q&A on the year-end call I addressed this, but I think it is worth going back to cover it again. We’re able to with a pretty high degree of accuracy know how much inventory is at the wholesale level, and so when we closed December of last year, we were just a little bit north of 1-1/2 months and obviously that’s a lot more than we carried for our promoted products. When we closed the first quarter at the end of March, we were at 4/10th of a month. So there was a dramatic workout and we’re happy that the inventory levels are down to what we refer to as normalized level, but what we did not know at the end of last year was how much was out of retail, how much the wholesalers had pushed out. So, the combination of those two things impacting the work-down resulted in the relatively low level of sales that we had for FLECTOR in the first quarter. Going forward, the orders that we’re getting to date through the first month, first five weeks of the second quarter, are tracking prescription demand. So, the level or the dollar amount of inventory work-down as we calculated was probably north of $15 million if we take everything into account. David, could you repeat your question on THROMBIN-JMI?

David Buck - Buckingham Research Group

If you looked at the IMS reported sales, they had been fairly close to what you reported in sales until this quarter, and your reported sales were considerably lower than the $52 million from IMS for the first quarter; so I was just wondering if there is any de-stocking there that you might have seen?

Joseph Squicciarino

Actually no, it was up slightly, but not much at all. It was essentially flat with year-end levels; however, the downturn was a combination of two things; price and then of course to state the obvious, a lower level of units, 5000 equivalent units that were sold, and that was split about 50-50 between the two.

David Buck - Buckingham Research Group

Just a followup on FLECTOR, wanted to repeat the question; the managed care wins, were there any major ones in the first quarter in the result. So, it was really more of a second quarter issue?

Brian A. Markison

I am going to let Steve Andrzejewski, our Head of Commercial Ops respond to that.

Stephen J. Andrzejewski

Yes, we did have some big wins in the first quarter; ESI and Aetna are two of them. We’re certainly working with a number of the other accounts as we move forward here into the second quarter and beyond.

Operator

Our next question comes from Ian Sanderson - Cowen & Co.

Ian Sanderson - Cowen & Co.

First just to clarify on the REMOXY meeting; has the meeting formally been scheduled there, and secondly, have you had any preliminary discussions with managed care on EMBEDA at this point and if you have, if any are the push-back issues; and third, on FLECTOR PATCH, we understand that the ACR guidelines whether this year are going to formally recommend topical products; are you seeing any buy-in ahead of that as you go along through the second quarter?

Brian A. Markison

We’ll start with REMOXY. I am sorry, but I didn’t get your third question, what was your third question?

Ian Sanderson - Cowen & Co.

On FLECTOR PATCH we have been hearing that the ACR guidelines coming out are going to recommend topicals, probably because of the acetaminophen concerns, and just wondering if you’re seeing any type of anticipatory buying ahead of that?

Brian A. Markison

With REMOXY we have a definitive meeting with the agency scheduled, but we’re obviously saying first half to July just to give ourselves a little more time because no matter how well we’re hoping the meeting goes, we always like to sit down and debrief and make sure whatever we’re going to tell our shareholders and the analyst community is the best answer we can give, but there is a definitive date scheduled, and on EMBEDA managed care, we’ve done a fair amount of market research and likewise Alpharma has done a fair amount of market research that we’ve had the ability to take a hard look at and it's very favorable. We think we’ll be launching EMBEDA into an environment that is looking forward to this technology and the potential promise that it could bring.

Ian Sanderson - Cowen & Co.

And do you anticipate getting, because of the unique nature of this product, formulary acceptance earlier than normal or might this be the standard six-month cycle?

Brian A. Markison

Yes, I think we’re going to run into the routine cycle of managed care simply because I don’t necessarily think formularies are going to stop what they’re doing and have urgent meetings; when a new product is introduced, it's covered for a while until things shake out in the marketplace and I think demand is going to be very good for this product early on and I think that along with the potential promise should certainly take care of itself.

Operator

Our next question comes from Elliot Wilbur - Needham & Co.

Elliot Wilbur - Needham & Co.

I just wanted to ask a couple of other product line questions, specifically on AVINZA, sales in the quarter was a little bit higher than we would have anticipated based on the script trends, I’m just wondering if you could provide some color behind that, and then also on the other product sales which you don’t report in the press release but which show up in the regulatory filings, those had been running somewhere in the order of $40 million to $45 million per quarter, it looks like there was a pretty significant downturn this period, I’m wondering is there anything in there specifically that may be hasn’t encountered during competition or is that more of a stocking issue? And then secondly for Brian perhaps, if there is any update you can provide us on some of the other opioid development programs, specifically those in collaboration with pain or Oxy NT that would be appreciated.

Brian A. Markison

Okay, first Joe will start off with AVINZA and the other products and then I’ll wrap it up.

Joseph Squicciarino

Yes, we did see an increase in the levels of AVINZA by wholesales in the quarter, we are still below a month for that product but we did see an uptake, so you’re spot on there, and we’ve seen that in the past where it will trend up one quarter and then work itself down, but again, I just want to emphasis, it’s in the normal range that we’re comfortable with. And then as far as the other branded products go, when you look at it versus last year, year-on-year we had a decline in sales of SONATA of $60 million, obviously that product went generic, and then the other driver that we had this quarter was that we saw a reduction in the royalties that we received for ADENOSCAN and that was a decline of $4 million to $5 million versus last year and again $4 million to $5 million versus the running rate that we normally see for the level of royalties for that product.

Brian A. Markison

And then I think the question was, the other abuse-deterrent opioids we have in development, Elliot, is that right?

Elliot Wilbur - Needham & Co.

That’s correct.

Brian A. Markison

So, starting out with the one that’s at the plate, the earliest here is ACUROX; with our end of June PDUFA date, the review is going so far unremarkably smooth with the FDA. So, we’re really looking forward to hopefully launching that product in the not too distant future. ACURACET is soon to enter Phase 3 very soon, we’re also likewise very excited about that. And with the other opioids we have in development with Pain Therapeutics, we don’t really disclose which ones they are and where they are, so I will not comment on that, but I think the headline here is ACUROX going great and ACURACET is now in the bullpen almost ready to go.

Elliot Wilbur - Needham & Co.

Brian, is there any update you can provide us OxyContin NT?

Brian A. Markison

Yes, what I could basically tell you is that with that and the other compounds that Alpharma had referenced last year, we are in the final stages of optimizing the formulation and that’s exactly where we are.

Operator

Our next question comes from Gregory Gilbert - Bank of America.

Gregory Gilbert - Bank of America

First, are you assuming that share and price for THROMBIN-JMI have pretty much stabilized or should we expect continued erosion ahead; secondly, Brian, I know you haven’t finalized things on EMBEDA, but based on what you know and expect today, will the REMS make the selling effort and expense for EMBEDA fundamentally different from that of the existing long-acting opioids; and third, is there any update on when you’re assuming generic competition of SKELAXIN for planning purposes?

Brian A. Markison

I think when you take a look at THROMBIN, we have been very consistent from day one saying that this will be an account-by-account lifecycle, those have been my exact words, and we believe we have a cost of goods advantage and we will compete very hard; so, while we’re looking at more recent data or the most recent data, it does look like share has leveled off a bit, but we’re not the sole determinant of that as you know, and if the competition wants to take it to another level on price, we’ll meet them there, that’s not a problem for us, but for now, it does look like things have leveled off a bit; what was your second question?

Gregory Gilbert - Bank of America

On the REMS, do you expect to have a slightly more visibility than we do, how fundamentally different could the selling effort be versus what we’re used to seeing?

Brian A. Markison

Really not much different at all under this context; I think the selling approach by and large for these new products will be educational in nature, but nonetheless it will be a sale, so there’s really not much difference that we’re anticipating here and our sales training programs have already taken into account the level of training that will be required; now, obviously if a class REMS has some additional things that we need to conform to, we’ll talk about it at that time. And I think you had a third question if I’m not mistaken, generic SKELAXIN right?

Gregory Gilbert - Bank of America

Yes, what’s the latest you can say on timeline expectations there; we know about the settlement in the 2011 launch; what else can you tell us between now and then?

Brian A. Markison

Well, when you say settlement in 2011 launch, we have an agreement with Cor, but they’re not projected under that agreement to launch until 2012, that is December 2012. I just wanted to make sure that we’re all on the same page. Now, obviously if someone else launches at risk, we’ll make every effort to put Cor in the market as fast as we can, hopefully even before the launching party. As far as the settlement is concerned with Sandoz, we’re wide open and would love to work something out with them, but at this time, things are moving very slowly on that front; and in terms of expectations for generic, we think it’s reasonable to assume that SKELAXIN could remain exclusive for the remainder of this year, but certainly not much beyond that at all, and if Sandoz chooses to launch earlier and should they gain an approval, then obviously it’s up to them when they would launch and whether or not they want to launch at risk. So, we think this year is probably okay but somewhat risky as you go further into the year, especially third and fourth quarter and full year next year, undoubtedly we would think you might see a generic competitor.

Gregory Gilbert - Bank of America

And if I could sneak one in for Joe, you gave some guidance on some P&L items, what do those ranges assume for EMBEDA launch timing?

Joseph Squicciarino

We’re updating that as each week goes by; right now we’re being optimistic and the range of investment behind EMBEDA, and let me answer the EMBEDA question first, that assumes that we’ll be launching EMBEDA shortly, in the very near future; and then ACUROX, by the time we get package insert and everything squared away, once we get hopefully an approval on the PDUFA date of June 30th, and its three to four weeks after approval that we’ll be shipping product, that’s the current plan; and then the level of launch spending is commensurate with that timing.

Operator

Our next question comes from Scott Hirsch - Credit Suisse.

Scott Hirsch - Credit Suisse

Just help me try to understand REMS a little better, why no expectation for REMS surrounding ACUROX; and in the same light, have you addressed yet a REMS solution for REMOXY?

Brian A. Markison

I think with regard to ACUROX, it’s a short-acting opioid, and as of today, the agency said that they’re not interested in implementing classified REMS for the short-acting opioids; so, however, time will tell as we go on; and as far as REMOXY is concerned, we submitted a REMS with REMOXY that was fairly complete and we’ll see how we go on that issue when we get a little bit closer with REMOXY.

Scott Hirsch - Credit Suisse

Onto Animal Health quickly, it clearly decreased in seeing the economic pressure, and maybe can you give us some color on the dynamics in the agri-business since it’s a little bit of a black box for us, and whether you guys have the balance sheet to allocate this year for new regulatory filings and new geography expansion?

Brian A. Markison

I think clearly this business does reflect the overall state of the economy and we’ve said before that 2009 will not be better on the top-line certainly than 2008 was. The balance sheet for Animal Health basically is the company’s balance sheet and we are looking at a number of expansion opportunities; certainly, we’re looking at Latin America and we’re also looking quite carefully at India; and when we look at all of the data and all the projections for basically for re-consumption over time, they’re all very strong, they’re all going up, and they would all suggest that the emerging markets, particularly Latin America, India, China, Asia Pacific are all markets that will be right for this type of expansion; so, I think we’re careful this year with the Animal Health business and not asking too much from them so that they can weather this storm and we are looking for ways to invest in the emerging markets within that business. Joe, do you want to answer that?

Joseph Squicciarino

I think you covered it well. We’re not going to provide revenue details by the different lines of business in the Animal Health business; however, I will say that this quarter through some prudent and disciplined control to expenses, and that is, I just want to be specific there, we did not do anything that would hurt the business short, medium, or long-term in terms of throttling back investments. We were actually able to improve the operating margin of the Animal Health business in the first quarter of this year and it was at the highest level since the first quarter of last year. So, we are pretty pleased with that accomplishment, and as Brian said, we are committed and we’re going to continue to invest behind the Animal Health business.

Scott Hirsch - Credit Suisse

So, the operating margin in Animal Health is plus 20% range now, and can you stay there?

Joseph Squicciarino

Yes, it is plus 20%, and yes, it can stay there.

Scott Hirsch - Credit Suisse

And then, just really kind of qualitatively, as you guys have been operating now for a full quarter with the Alpharma business, can you just give us some sense of how the integration is going, is it going faster, slower than your previous expectations, and is it easier or harder than you previously thought?

Joseph Squicciarino

It’s a good question because at the end of the day it all comes down to people. We are absolutely delighted with our colleagues that have joined us from Alpharma, really quality people, whether it be on the Animal Health side or it be on the sales force side or in commercial ops, the integration has gone seamlessly. There is really not much left to do with the integration now; the one last overhang whenever you bring two companies together typically is systems integration, we have a little bit of work to do there, but as we speak, I don’t know if you can hear the noise that’s behind us, the Animal Health people are moving into our facility today, and so really that’s the last piece of the puzzle that these two come together and it’s really come about really well, and Brian, just wants to add to that.

Brian A. Markison

The pharmaceutical integration has been complete for some time now, and again, as Joe mentioned, the last piece is the Alpharma Animal Health business moving in basically as we speak and roll under one roof, and I think the other thing to add to this is we are excited about EMBEDA and the possibility to develop the other compounds in that portfolio and some of the people that came with it, and also FLECTOR PATCH has been a lot of fun to promote for the sales force at King Pharmaceuticals and Alpharma because it’s just an exciting product to sell and it’s easy. So, it’s all been good news so far in the integration front and a lot of thanks go to some folks that worked very hard to get it done this quickly.

Operator

Our next question comes from Michael Tong - Wachovia Capital Markets.

Michael Tong - Wachovia Capital Markets

Just a followup on the SKELAXIN question; I am just interested in hearing your insight about how you think or how do you come to the conclusion or at least the expectations that you can maintain SKELAXIN exclusivity for pretty much all of ’09; and then my second question has to do with the Animal Health business, you’ve said in the past that you are looking into that business both in terms of expansion and maybe in certain instances divestiture, now that you have a quarter of that business under your belt, what’s your current thinking with respect to Animal Health and where does that business rank from a business development opportunity perspective relative to pharmaceutical product situations?

Brian A. Markison

I actually don’t recall ever describing the Animal Health business as something that was ready for divestiture; now certainly what I think what I have said over time was if we get out there as our new products launch well and the growth in the pharmaceutical business is really taking off like we all hope and it looks like Animal Health is a drag on the total business, then at that time I think we would think about alternatives, but right now we’re just happy to have them and happy that they’re moving in and it’s providing some buoyancy to our sales and revenue lines and earnings line and some nice cash flow. With regard to SKELAXIN, number one, Sandoz doesn’t have an ANDA approval, and they could get one at any time, so I am not saying otherwise. They also could get approval earlier and decide that they want to launch at risk earlier and that’s up to them. So, we think it could go a little bit longer certainly. I would hate to see Novartis launch at risk while we have an appeal that will be pending which we haven’t even been able to enter yet, and also another patent case in New Jersey that really is in its infancy and I think that would be difficult for Novartis to do regardless of how they feel about SKELAXIN being a branded company primarily more so than a generic company. So, anyway that's kind of how we are looking at it and of course we’re open to talk to Sandoz about settling.

Michael Tong - Wachovia Capital Markets

And just a quick followup on the Animal Health part, in terms of some of the potential expansion opportunities that you have, where does that fit in terms of launches for EMBEDA, ACUROX, and maybe on the longer-term horizon of REMOXY?

Joseph Squicciarino

It always comes down to resource allocation and how the timing of investments and what’s going to yield the greatest return for our shareholders, and that’s exactly the exercise that we’ve been going through the past couple of weeks. As Brian mentioned, there are a couple of opportunities in the Animal Health business that we find intriguing if the any assumptions behind the forecast that we’ve made are correct, we’re pretty excited about making those investments, nut once again, it comes down to, there’s a finite amount of capital and resources that we have available to invest and we’re going to be finalizing those decisions over the next couple of months.

Operator

Our next question comes from Robert Hazlett - BMO Capital Markets.

Robert Hazlett - BMO Capital Markets

Couple of basic ones and then some broader strategic ones, just any price increases in the quarter that await and how much did the change in the amortization add to the quarter, the non-GAAP numbers in the quarter; then, kind of more broadly, what are your expectations for final FDA action for REMOXY, and do you believe you are ahead or behind potential competitors from Purdue; and then, I guess to touch on what Michael was talking about, just what’s your appetite currently for additional licensing, in pharma licensing, again what kind of comment on the Animal Health, but on the pharma side given all that you’ve done over the past several years?

Brian A. Markison

Let me start from the last question asked and we will work our way back; on the licensing front, we have a pretty good appetite for some very interesting transactions that are potentially out there; we’re in discussions now with a couple of parties, and we think within our strike zone which appears to be neuro at this time, particularly pain obviously, we think we’re looking at a couple of decent opportunities, and of course, as we go through the year, that activity is going to ramp up, but I want to remind everyone that’s listening that our primary focus earlier on has been get the integration over with and get the synergies and begin to repay that debt and generate a meaningful cash flow. So, licensing is pretty interesting to us; we’re looking at a number of opportunities right now and a couple of those are very exciting. With the FDA and REMOXY relative to Purdue-Frederick’s compound, as you know Purdue-Frederick is a positively healthy company. We really don’t have any visibility as to what’s happening with their formulation. When we looked at their profile versus REMOXY’s profile, we believe from what we’ve been able to see that REMOXY is going to be a very good product and to us it really doesn’t matter when or if they get approval for their OPR, but we’ll see how that goes. We think coming out of the meeting that we have with the agency in July, we’ll be able to give everyone out there a revised estimate for a timeline for our submission to the agency in answering all their questions on a complete response letter, and again, I think we believe we’ve got a good plan, we have all the right elements in place to have a very productive dialogue with the agency, and we’re confident that we’ll have a good meeting.

Joseph Squicciarino

As far as price increases go in the first quarter, we did take a price increase on AVINZA and that was a single-digit price increase. Your question is a good one as to what the impact was on EPS for the intangibles and the reason I say that is the table and the reconciliation that we attached to our press release can be somewhat confusing, and we’re going to figure out a way to make it less so, and what I mean by that is if you look at the reconciliation in our press release, it shows an amount that is accurate of course, that’s $38.2 million for the intangible amortization, and then next to that in the EPS column, it is quantified as $0.16. So, that $38.2 million is a pre-tax number as is that $0.16, and then later on down the reconciliation, we show a catch-all amount of about $43 million for the income tax benefit for all of these non-GAAP measures. So, to answer your question, the $0.16, once it is tax affected, becomes $0.10, and likewise, the $4.4 million for the non-cash convertible interest expense becomes $0.01. Not that we want to do this, but that $0.26 of EPS if it had been calculated the old way that we had done it, meaning not taking amortization and the non-cash interest expense into account, would’ve been $0.15 this quarter.

Operator

Our next question comes from John Newman - Oppenheimer & Co.

John Newman - Oppenheimer & Co.

First, did you see any de-stocking of SKELAXIN this quarter? Second, what type of selling should we expect to see in the second quarter out of SKELAXIN and FLECTOR? Lastly, on REMOXY, have you started the likeability studies yet, and if so, would you be submitting those in a complete response to the FDA?

Brian A. Markison

As far as the SKELAXIN inventory levels go, we have for the past three quarters held it at a constant rate. So, we have not seen any de-stocking. Your second question was?

John Newman - Oppenheimer & Co.

Should we expect to see any kind of a heavy selling on SKELAXIN or FLECTOR in the second quarter? I don’t know if you contracts in place which force the wholesalers to maintain levels that are close to demand?

Brian A. Markison

No, our IMA agreements with the wholesalers are in fact pretty tight in that we do not encourage them and in fact there’s a limit as to the amount in terms of months, number of weeks that they can hold. So, no, we don’t encourage our wholesalers to buy above that and we have mechanisms in place that if they do so, there is a penalty involved. So, no, we’re anticipating any volume and nor do we encourage it.

Joseph Squicciarino

With respect to your question on REMOXY, we will be submitting a likeability study as a part of our submission to the FDA with regard to our complete response letter, but I’ll need to make sure that everyone is clear that the agency has not requested that as a condition of approval. What has taken us quite some time is to figure out the methodology that’s most appropriate for REMOXY given the fact that it’s a very unique formulation, but again, very different from a product like EMBEDA where you’re looking at a crushed altrexone as the key variable here. So, we are doing this basically voluntarily. We think we’ve got a very good design that will address this issue, and again, it is not necessary as a part of the overall approval for REMOXY, but it’s something that we feel we should do based on the fact that there has been quite a lot of interest in seeing this.

John Newman - Oppenheimer & Co.

Have you started those studies yet?

Joseph Squicciarino

I’m really not commenting on it. So, all we’re going to say is that we’re going to be submitting a likeability trial to the agency, and it’s a pretty competitive set as you can imagine.

Operator

Our next question comes from Corey Davis - Natixis Bleichroeder.

Corey Davis - Natixis Bleichroeder

The buzz at EPS really was all about these new opioids and the REMS. I think it’s safe to assume that all specialists out there are very aware of this product, but given much of the market for these really comes from a more diffuse target audience for both EMBEDA and ACUROX; is targeting specialists at launch really the best strategy? What other tactic are you going to use given the diffuse prescriber base?

Brian A. Markison

Certainly with EMBEDA that’s the target audience that we’re calling on right now, we’re very comfortable with that. ACUROX as you are suggesting is a little more diffuse and we’re spending I would say a huge amount of time making sure that between AVINZA, EMBEDA, and FLECTOR that we have the right prescribers covered and the right frequency on those prescribers to optimize both of these products. So, it’s something that we’re really thinking about heavily especially when you look at resource allocation; EMBEDA, I think, we’ve got that one covered off really well. ACUROX, I think, we have a little more fine tuning to go, but we have the time to do that.

Corey Davis - Natixis Bleichroeder

Secondly, any new progress on the intellectual property protection for both EMBEDA and REMOXY?

Brian A. Markison

Yes, but nothing that I can disclose on this call.

Corey Davis - Natixis Bleichroeder

Positive development?

Brian A. Markison

Yes.

Operator

Our next question comes from Gregory Gilbert - Bank of America.

Gregory Gilbert - Bank of America

Brian, can you give us a little color as to what led to King taking no real responsibility for paying on REMOXY?

Brian A. Markison

Yes, I think it’s really fairly straightforward; we have a deeper organization than PTI. I think over the last two years we’ve hired a number of really good people both up in Bridgewater and in North Carolina where R&D is headquartered, and Dr. Carter is sitting next to me, I think when we first did the transaction with PTI, King did not have many of the experts in place to really carry out these studies, and Pain Therapeutics really, if you look at their Phase 3 study, they get them done very quickly and they know what they’re doing. I think when you get into all of the elements around a new drug application and all of the different levels of expertise that are required across the company, we’re certainly more suited now and I think it was the right time to take this hand off from PTI.

Gregory Gilbert - Bank of America

One other followup; can you remind us about your strategic goals and priorities for CorVue, Brian?

Brian A. Markison

Thank you for asking about CorVue. I feel like it’s the step-child that didn’t get a lot of attention on this call. We’re looking forward to an advisory committee that’s going to be happening at the end of July and I think coming out of that advisory committee, we have I believe in October PDUFA date. When we get a feel for how strong the label will be, we will either go-it-alone or will entertain partnering the product with someone else that’s actually focused obviously in this space at this time. Number one, let’s get through an advisory committee that we’re going to be very well prepared for; number two, let’s hope that we can work with the FDA to meet the PDUFA date and get this product approved, but that again based on the strength of the labeling that we receive provided the first two go well, then we’re going to make the go-it-alone versus partner decision. I don’t think it’s no secret, we’ve more or less been leaning toward partnering the molecule because certainly that’s not where we’re concentrated at this time and we don’t want Steve and his Commercial Team to lose focus from ACUROX, REMOXY, and EMBEDA as we give out the launch of those new products, and really FLECTOR which is still in a launch mode.

Gregory Gilbert - Bank of America

So, really, the panel meeting can be instructive and can affect the value of the asset and then you can turn up the dial on partnership discussions; is that the right way to think about the timeline?

Brian A. Markison

I think as with any product that stays in an advisory committee, a long swings on how that committee meeting will go.

Operator

With no further questions I’d like to turn the call back over to Mr. Robinson for closing remarks.

David E. Robinson

Thank you for joining our call today. We appreciate your interest in King Pharmaceuticals and look forward to speaking with you again when we report financial results for the second quarter.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!