King Pharmaceuticals Inc. Q3 2007 Earnings Call Transcript

King Pharmaceuticals Inc. (KG)

Q3 2007 Earnings Call

November 8, 2007, 11:00 AM ET

Executives

James E. Green - EVP of Corporate Affairs

Brian A. Markison - Chairman President and CEO

Joseph Squicciarino - CFO

Stephen J. Andrzejewski - Chief Commercial Officer

Dr. Eric Carter - Chief Science Officer

Analysts

Adam Greene - J.P. Morgan

Ian Sanderson - Cowen & Company

Gregory Gilbert - Merrill Lynch

Corey Davis - Natexis Bleichroeder

Donald Ellis - Thomas Weisel Partners

Angela Larson - SIG

Michael Rockefeller - Morgan Stanley

Andrew Swanson - Citigroup

Robert Hazlett - BMO Capital Markets

Presentation

Operator

Good morning. Thank you for joining today's King Pharmaceuticals Third Quarter 2007 Financial Results and Strategy Call Update. Please welcome James Green, King's Executive Vice President of Corporate Affairs.

James E. Green - Executive Vice President of Corporate Affairs

Good morning ladies and gentlemen. Thank you for joining us today to discuss our financial results for the third quarter ended September 30th 2007 and our planned strategic shift emphasizing on neuroscience and hospital platforms. I hope everyone is viewing the slide presentation online as we will refer to the slides during this call.

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 copyrighted 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 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, November 8th, 2007, and in the risk factors section another sections of the company's Form 10-K for the year ended December 31, 2006 and Form 10-Q for the quarter ended June 30th, 2007, 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 includes 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 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.

The specifics of special items affecting the third quarter and reconciliation of non-GAAP financial measures to GAAP can be found in this morning's press release and are shown here on this slide. 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, this should be noted that the determination of whether to classify an item as a special item involves judgments parameters.

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

Brian A. Markison - Chairman President and Chief Executive Officer

Good morning and thank you for joining us. Today Joe Squicciarino, our Chief Financial Officer will begin by briefly reviewing the company's quarterly results. Next I will discuss the recent steps King has taken to accelerate its strategic plan, focusing on our neuroscience and hospital platforms. Then I will outline in more detail King's integrated growth strategy to best position the company for long-term growth and shareholders' value creation. Lastly, we will of course take your questions.

Now for a review of our financial results for the third quarter, I will turn the call over to Joe.

Joseph Squicciarino - Chief Financial Officer

Thank you, Brian and good morning every one. Reviewing highlights of our financial results for the third quarter of this year. Revenues totaled $545 million, an increase of 11% over last year. Net revenue from our branded pharmaceuticals segment totaled $472 million, a 9% increase from the third quarter of 2006. Wholesale inventory levels of all of our key branded products were at or below second quarter levels.

Meridian contributed $48 million compared to $37 million in the third quarter of last year. Our gross margin, excluding special items, was approximately 79% which is about 1% higher than the second quarter of this year. This was primarily driven by a higher level of alliance revenue and product mix.

Total selling, general and administrative expense, excluding special items, and our co-promotion fee for Altace equaled $135 million. As anticipated, this is a higher level of spend versus previous quarter's due to increased investments in sales and marketing, particularly with respect to AVINZA. Our co-promotion fee for Altace was $49 million.

Depreciation and amortization, excluding special items, totaled $35 million. Research and development expense equaled $35 million which was lower than we originally anticipated due to the discontinuation of bremelanotide development program. R&D expense for the first nine months of 2007 totaled $105 million compared to a $103 million in the same period of last year.

Our effective tax rate for the third quarter, excluding special items, was approximately 30.4%. For the third quarter GAAP loss per share was $0.17. When special items are excluded earnings per share were $0.52.

Cash from continuing operations totaled $174 million. As a result, cash flow from continuing operations for the first nine months of this year totaled $427 million. With such strong cash flow our un-restricted cash and investments in debt securities as of September 30th of this year totaled approximately $1.1 billion.

Now let's discuss some of our expectations with respect to the fourth quarter of this year and 2008. We anticipate gross margin of approximately 76% in the fourth quarter, and we expect gross margin in 2008 to range from 72% to 75%. The anticipated lower gross margin in both periods is driven by the launch of the Altace tablet this year which has significantly lower margins compared to the capsule.

With respect to SG&A as we previously disclosed, we estimate that the 2008 expense savings from our restructuring will range from $75 million to $90 million. These savings exclude the anticipated reduction in our Altace co-promotion fee. In connection with our restructuring, we incurred a special charge in the third quarter of approximately $146 million to recognize the impaired value of our Altace intangible assets.

In doing so, we shortened the lives of the remaining intangible assets associated with Altace. These determinations were based on a probability weighted analysis of the various scenarios pertaining to the future of our Altace franchise. As a result, we expect depreciation and amortization expense in the fourth quarter of this year to be approximately $40 million, and to increase on a quarterly basis in 2008 to a range of $42 million to $43 million assuming no future impairment.

With respect to R&D, we anticipate that our full year 2007 investment will be in line with last year. This is lower than our original expectations as a result of the discontinuation of the bremelanotide development program. Additionally, we expect that our 2008 R&D investment will be in line with 2007. If we were to pay all potential milestone payments that come due next year, our total R&D investment could reach approximately a $170 million.

Finally, we anticipate continued strong cash flow this year and next. Given the actions we have taken in connection with our restructuring and the ongoing strength of our brands, we expect that our cash flow from operations in 2008 will potentially range from $400 million to $450 million.

Now I would like to turn the call back over to Brian.

Brian A. Markison - Chairman President and Chief Executive Officer

Thanks Joe. I will now review a number of significant steps King has taken that we believe will better position the company for long-term growth and shareholder value creation. Some of these steps have been underway over the last two years and others we have made recently.

In late October, we announced some of the actions, we are taking to accelerate our planned strategic shift to focus on specialty driven markets, where we have core capabilities of assets, as well as a strong presence, and a demonstrated commitment to meeting the needs of patients, and physicians. Specifically, I am referring to our neuroscience and hospital platforms. To support the acceleration of our shift in focus we moved very quickly to realign our organization and cost structure.

We previously announced initiatives that are estimated to result in SG&A expense savings next year of $75 million to $90 million, as Joe described a few moments ago. These actions include restructuring the size and focus of our sales force to better support the priorities of our strategic plan and appropriately meet the needs of our target markets. And then we made difficult decisions with respect to reducing our sales force. We believe we succeeded in retaining the best people to address the needs of the customers in our target markets.

Of course, the key need near-term catalyst driving the acceleration of our plan was the September U.S. Court of Appeals ruling declaring the Altace patent invalid. We had filed a petition with the court seeking reconsideration of the decision asserting that there are significant errors in its ruling. We are not through challenging the ruling, but the court's decision made it clear that we needed to be proactive and speed up our transition in order to best position the company to maximize the value of our portfolio.

Our commitment to accelerating our plan is also exemplified by our recently announced agreement with Acura to license rights to their Aversion Technology to develop and commercialize a wide range of abuse deterrent immediate release opioid products. This transaction directly aligns with our emphasis on King's neuroscience and hospital platform particularly our pain management franchise. Although recent events served as a catalysts to accelerate our shift in focus to specialty driven markets this transformation has been underway since the beginning of 2005.

Our long-term planning took into consideration the eventual loss of Altace exclusivity. Accordingly, we recognized early on that we needed to develop a direction that would serve to utilize the near-term strengths of our Altace franchise as a bridge to the future. Additionally, we recognized the importance of managing our business to generate cash flow and build a strong cash position.

To further our strengthen our cash position, we selectively monetized those assets that were not integral to our long-term plans as evidenced by our sale of our Rochester, Michigan sterilemanufacturing facility to JHP Pharmaceuticals and consolidated operations for efficiency when appropriate, as evidenced by the upcoming transfer of Levoxyl production to our Bristol, Tennessee facility, and subsequent expected closing of our St. Petersburg Florida manufacturing plant by the end of 2008.

Importantly, we recognize they are growing pain franchise, as well as our strength in the hospital market with Thrombin-JMI were strong bases in which to build our future. As you can see on the slide, everything in black was either on the market or in development at the end of 2004. Since then we have added all the products and development programs shown here in white.

As you can see, we have diligently invested in our neuroscience and hospital platforms particularly in our pain franchise. These investments include the addition of an approved product, AVINZA, a true once a day today extended-relief morphine pain medicine. We have also invested in our development portfolio adding the ORADUR abuse-deterrent formulation technology with Pain Therapeutics and our company are utilizing to develop up to four extended release opioid pain products including Levoxyl. And as I mentioned just last week we added Acura's Aversion Technology platform for the purpose of developing a wide range of abuse-deterrent immediate release opiod pain medicines, which includes Acura's tablets. Clearly over the past few years, we have steadily executed against our intended strategy of developing partnerships to add strong and exciting products to our portfolio.

On the next slide, you can see how we view our company today. Going forward, we will include our cardiovascular/metabolic assets as part of a broad category of other assets which also includes in many of our legacy products. We fully intend to continue maximizing the value of Altace and are already accepting orders from the trade for the Altace tablets, However, in light of recent events, we are currently reevaluating whether to continue developing the Altace diuretic combination product.

As for Corview [ph] formally known as binodenoson which we know include in our hospital product portfolio, we are pleased to report that preliminary results from the first of our two large Phase 3 pivotal trials showed that Corview [ph] met its primary endpoint indicating that it is as efficacious as adenoscan and based on this study appears to have an improved safety and tolerability profile.

Additionally since Corview [ph] is administrated as a bolus injection, it is potentially easier to administer. Based on the apparent success of this trial, we plan to proceed with the evaluation of our second pivotal Phase 3 trial. Whether we will ultimately promote this product ourselves or out-license it is currently a matter under active consideration.

The core elements of our growth strategy remain unchanged. We plan to continue maximizing the value of our marketed products, delivering on our promising pipeline and further strengthening our core capabilities. To support our organic growth we will continue to have a strong commitment to R&D especially with respect to those initiatives that complement our neuroscience, hospital and acute care medicine platforms.

Importantly, our business development initiatives will continue to be a major contributor to the company's long-term strategy for growth. As I mentioned earlier, we have restructured the size and focus of our sales force to best support the priorities of our strategic plan and appropriately meet the needs of our target markets. We are confident that our selling team will provide us with a strong presence in these target specialty markets where we believe our deep experience and strong relationships will enable us to maximize revenue potential of our portfolio.

Specifically, as depicted on this chart, our dedicated field sales force currently consists of approximately 680 individuals. This organization includes a primary care group of 415, a neuroscience specialty team of 150, and a hospital specialty team of 115. We will promote Skelaxin and AVINZA using both our primary care team and neuroscience specialists. Primary care will also market Altace tablets. The company's hospital specialists will promote Thrombin-JMI and our other innovative Thrombin-JMI based products. We believe this structure provides our commercial operations team with the ability to successfully compete in these specialty driven markets as well as targeted primary care markets.

Now I would like to provide you with a closer look into our currently marketed products and our pipeline for the hospital market. Our hospital franchise is anchored by Thrombin-JMI. In order to better meet the needs of our customers and in advance of increased competition, we've introduced new Thrombin-JMI delivery devices broadening the range of delivery options and expanding the use of Thrombin-JMI to new areas of the hospital.

These new delivery systems include Thrombi-Pad Thrombi-Gel and the Thrombin-JMI Epistaxis Kit as well as an additional product Thrombi-Paste which is currently in development. We expect to file applications with the FDA seeking approval of Thrombi-Paste and the surgical indication for Thrombi-Gel in the first half of 2008.

Thrombin-JMI is an extremely reliable and safe product that possesses a 12-year track record of safety and efficacy in an estimated 12 million patient procedures. It offers a range of delivery options for surgeons giving them significant flexibility in its application during surgery. This allows Thrombin to effectively reach more kinds of bleeding site than any other topical hemostatic agent which is essential to efficiently achieve rapid hemostasis.

Last week, we announced that we filed the citizen's petition with the FDA regarding the appropriate approval and labeling standards to a follow-on topical recombinant Thrombin products. In the petition, King asserts that ZymoGenetics is pursuing approval for its recombinant Thrombin through and abbreviated pathway that we believe is contrary to federal law. Our position is primarily based on public statements made by ZymoGenetcs.

We have requested the FDA to require adherence to the requirement for two adequate and well controlled clinical trials as we believe ZymoGenetics has not submitted adequate data for approval of its recombinant Thrombin product. We are also asking the FDA to prohibit labeling that would allow comparative superiority claims unless those claims are substantiated by evidence derived from adequately powered comparative clinical trials.

We have specifically requested that the FDA require class labeling that the clinical relevance of immunological data is unknown. As their own clinical trial indicated, that there were no safety differences between Thrombin-JMI and recombinant Thrombin. Ultimately this is about ensuring that surgeons and patients have confidence that active topical haemostatic products are certified as safe through accepted rigorous approval processes and that shortcuts are not allowed that might raise questions about all topical hemostats including our own.

Now, I would like to turn your attention to our neuroscience portfolio specifically to our growing pain management franchise. It would be an understatement to say we have been busy in this area. And our activity in this market is directly correlated with our conviction that this represents an exciting long-term growth platform for King. Our prospects in this area are at different stages of their life cycles. In AVINZA and Skelaxin we have strong promoted brands that continue to generate meaningful sales and cash flows. We do not have any update with respect to the Skelaxin patent challengers.

Our pipeline possesses two very exciting platforms for abuse-deterrent opioid compounds. One, for acute pain, and the other, for chronic pain. Our recent agreement with Acura provides us with a potentially wide range of abuse deterrent immediate release opioids utilizing the patented Aversion Technology platform. This directly complements our exciting Phase III extended release oxycodone product, REMOXY that we are developing with Pain Therapeutics which is also designed to deter common forms of abuse.

Our respective agreements with these partners include multiple undisclosed abuse deterrent products currently in development. Opioids play a very important role in the effective management of moderate to severe pain. But King recognizes abuse and misuse of these medicines represents a major area of concern amongst physicians, pharmacists, patients and the entire health care community. That's why we are committed to addressing this critical public health issue and the needs of patients and physicians by focusing on developing viable pain medicines that utilize safe and appropriate means to discourage abuse and misuse.

As a treatment for neuropathic pain, King is developing a new chemical entity T-62, and adenosine A1 allosteric enhancer that enhances the effectiveness of endogenous adenosine to effectively treat neuropathic pain.

The results of our Phase I clinical trial program showed early signs of efficacy. We recently decided to amend the Phase II protocol for T-62 in order to simplify the design. We believe the amended protocol should accelerate the recruitment of patients for Phase II program. As a result, our original timeline for submission of an NDA for this drug is expected to remain unchanged. Enrollment in this program is expected to begin during the first half of next year.

We believe that REMOXY represents the first of an entirely new class of proprietary drugs extended release opioid pain killers was a potential to significantly reduce common forms of abuse. King and Pain Therapeutics expect to report top line results from the pivotal Phase III clinical trial, evaluating REMOXY before the end of the year and our current plan is to file an NDA in 2008.

REMOXY's proprietary drug delivery system provides sustained released characteristics in a highly viscous solution. When products formulated with this technology are crushed the long-acting metrics is preserved preventing a rapid release of oxycodone which renders this formulation resistant to most common methods of abuse such as injections snorting, thermal extraction and rapid dissolution in a wide variety of liquids. As a result, once approved, we believe products formulated with this technology will provide physicians and patients with a safer option for extended release opioids.

Last week we entered into an agreement with Acura Pharmaceuticals to license, develop and commercialize our potentially wide range of immediate release opioid products utilizing Acura's patented Aversion Technology platform. The agreement initially targets development and commercialization of four immediate release opioid products including ACUROX tablets for treating moderate to sever acute pain.

Earlier this year, Acura reached agreement with the FDA on a special protocol assessment, for the development of ACUROX and in September began enrolling patients in the pivotal Phase III trial. We expect to complete Phase III in the second half of 2008.

Clearly based on my comments throughout this presentation today partnering with Acura perfectly aligns with our recent decision to accelerate our plan to place greater emphasis on King's neuroscience and hospital platforms, particularly our growing pain management franchise. Importantly, ACUROX tablets provide us with another near term revenue opportunity. We also believe that financial structure of our agreement with Acura has an appropriate balance of risk and reward. The key terms of the agreement have been previously disclosed.

On this slide you can see how the Aversion Technology platform is designed to deter the three most common methods of prescription drug abuse and misuse. If an abuser attempts to extract the opioid active ingredient from an ACUROX tablet and dissolve it in a liquid for purposes of intravenous injection or oral consumption, no liquid becomes a viscous gel which traps the opioid ingredient and deters by the injection. It is expected that if an abuser tries to crush an ACUROX tablet, snort or inhale the crushed powder an ingredient in the crushed tablet will cause major irritation and discourage abuse of the drug in this manner.

Finally, if an abuser attempts to swallow excessive quantities of ACUROX tablets it is expected that they will experience highly unpleasant effects from the Niacin active ingredient in the tablet and does discourage abuse. Our strategy for growth will continue to improve leveraging our business development capabilities that utilize a disciplined and systematic process to acquire and in-license additional drugs in Phase II and III of development that complement our strengths particularly with respect to our neuroscience and hospital platforms.

Our acquisition of AVINZA and our strategic alliances with Acura Pharmaceuticals and Pain Therapeutics exemplify this continuing strategy to significantly expand our opportunities for growth through the addition of high potential late stage product candidates, platforms and technologies.

King is well positioned to achieve long-term growth and deliver value to shareholders. We believe we have a robust business model with many key competitive strengths including well established commercial operations, disciplined and effective business development as well as strong capabilities in R&D, medical affairs and manufacturing. Furthermore King is led by an experienced management team. We will continue to leverage these strengths as we focus on specialty driven markets where the company has a significant presence and strong capabilities and assets.

We are excited about our current portfolio with strong marketed products and a growing developmental pipeline. I would also like to highlight that if we were to focus for a moment on our two opiod abuse-deterrent platforms, and a 5% market share of both the short acting and long acting markets, that would translate into approximately $700 million of revenue in 2010 at branded product pricing.

Additionally, we will continue to leverage our strong balance sheet and cash flow to further increase our presence in the neuroscience, hospital and acute care medicine markets and opportunistically expand into other attractive specialty markets.

King is well positioned to execute on its strategy to maximize long-term growth and value creation.

Now, we will turn the call back over to the operator for a question-and-answer session.

Question And Answer

Operator

Thank you Mr. Markison. [Operator Instructions]. Our first question comes from Adam Greene of J. P. Morgan, please go ahead.

Adam Greene - J.P. Morgan

Thanks good morning. First, your gross margin guidance of 72% to 75% seems awfully low for next year, and I understand the dynamics with the relative payment there. So, what is your assumption behind the conversion of... from the capsules to the tablet, are you assuming the vast majority of that franchise is converted? And second, are the capsules still on the market at this point?

Brian A. Markison - Chairman President and Chief Executive Officer

Yes, Adam thanks for the question, this is Brian. We are certainly assuming that at some point next year, the vast majority of the capsules will be converted to the tablets.

Adam Greene - J.P. Morgan

And the capsules are still in the market, or you haven't pulled them, or anything?

Brian A. Markison - Chairman President and Chief Executive Officer

We are not planning to pull the capsules from the market, yes.

Adam Greene - J.P. Morgan

Okay. Thank you.

Brian A. Markison - Chairman President and Chief Executive Officer

You are welcome.

Operator

Our next question comes from the Ian Sanderson of Cowen.

Ian Sanderson - Cowen & Company

Hi good morning. Thanks for my taking the question. On ACUROX what type of... can you talk a little bit about the Phase III study designed to presumably get some of these either temporary resistance or abuse-deterrence claims?

Brian A. Markison - Chairman President and Chief Executive Officer

Yes Ian, thank you for the call. We are not going to disclose at this time the exact studies we will be doing to enhance our labeling with abuse-deterrent claims. We will disclose that the trial, Phase III trial is under a SPA with the agency and it's a bunionectomy study versus placebo.

Ian Sanderson - Cowen & Company

And a quick follow-up. Should Skelaxin and generics hit in the first half of next year, how would your sales force structure plans change if at all?

Brian A. Markison - Chairman President and Chief Executive Officer

Ian, I think that's a great question. We will certainly preserve the flexibility in our entire cost structure to look again at expense reduction opportunities, but as our confidence grows in the pipeline products, we may choose not to make a sales force reduction at all.

Ian Sanderson - Cowen & Company

Thank you.

Operator

Our next question comes from Kim Seth [ph] of Goldman Sachs. Please go ahead.

Unidentified Analyst

Well good morning. Thanks for taking the question. The question about Acura, the Acura deal and ACUROX, and the potential impact on the REMOXY promotion efforts on your part. And the question is have you talked about with Pain Therapeutics? How do they feel about it? And what is the potential for competition or cannibalization from the REMOXY opportunity?

Brian A. Markison - Chairman President and Chief Executive Officer

Kim, that's a great question. Thanks. When we look at the short acting and long acting space the first product up from the Acura alliance will be ACUROX, which is a single entity oxycodone product. And it's very complementary to our REMOXY plans, because when we took a very close look at the call audience and the prescriptions for both products there is easily a 70% overlap between the two and most often patients are getting a short acting oxycodone product with a long acting opioid. We also have John Lolotta [ph] with us today and I think John, if you would like to elaborate a little bit on that.

Unidentified Company Representative

Certainly Brian. In addition with respect to positioning both brands, REMOXY will be positioned against other long acting strong opioids, i.e. the oxycodones and diuretics of the world for patients with moderate-to-severe chronic pain, as well as for inappropriate use of current immediate release weak opioid such as Vicodin and Percocet whereby approximately 30% of the immediate release weak opioids are currently being prescribed inappropriately for chronic pain syndromes. On the flip side of the equation, the ACUROX brand will be positioned most appropriately for acute pain syndromes and as Brian mentioned before there's also potential synergy because all long acting prescription opiod should be accompanying by an immediate release weak opioid for breakthrough or incident type pain.

Unidentified Analyst

Okay just a quick follow up on that. In terms of the promotional efforts is there a prioritization in terms of the position in the bag or is there... can you talk then any differences in the sales force instead of that would be beyond the two product?

Brian A. Markison - Chairman President and Chief Executive Officer

Yes thanks Kim. I am going to turn that over to Steve Andrzejewski.

Stephen J. Andrzejewski - Chief Commercial Officer

I think the first point to make is that there is a lot of overlap in terms of the doctors that were calling on for both the long acting and immediate release product. So we will be sizing our sales force to take advantage of both opportunity and the priority will be based on the potential for each doctor not necessarily one over the other.

Unidentified Analyst

Okay, thanks.

Operator

Our next question comes from Greg Gilbert of Merrill Lynch. Please go ahead.

Gregory Gilbert - Merrill Lynch

Thanks one for Joe and one for Brian, first Joe on the SG&A savings, what numbers are those savings relative to the '07 run rate, I am looking for specific number that the savings come off of?

Joseph Squicciarino - Chief Financial Officer

Sure.Thanks Greg, yes the range of savings that we are talking about $75 million to $90 million in 2008 would be versus the 2007 run rate.

Gregory Gilbert - Merrill Lynch

Okay and then for Brian you mentioned that you are taking orders on Altace tablets. Can you provide some more color on your strategy, and positioning, and when you expense generic capsules to be out there? I know that's a big question. We will take whatever you're willing to talk about. Thanks.

Brian A. Markison - Chairman President and Chief Executive Officer

: Yes Greg thank you. It's a bit influx at the moment, which is why we've really highlighted the fact that we want to move on with company and refocus on to our neuroscience and hospital platform. However, the federal circuit is right now hung up with the appeal. We're hopeful that we're going to come out of that in good shape, but beyond that we really can't predict exactly when the federal circuit will render a final ruling again. And then how that will start to trigger of the 180-day exclusivity for Cobalt, so there is way too many variables. So that's why we took a very hard look at our options, decided to move ahead with our strategy that we were going to employ anyway and launch the tablet as soon as we could. We'll be actively promoting the tablet, as soon as we have samples in our sales force hands. Right now we're ensuring that we've going to stock the trade appropriately. Some time in December, we know we'll have a very high level of stocking in the trade and then at that point, we will evaluate exactly when we want the sales force to start actively promoting tablets with doctors.

Gregory Gilbert - Merrill Lynch

And I know you're not pulling anything, but should we assume that you're no longer shipping capsules, but would be shipping tablets instead of what normally would have been capsules, is that the way to think about it?

Brian A. Markison - Chairman President and Chief Executive Officer

: We are not going to address that at this time Greg, but thank you.

Gregory Gilbert - Merrill Lynch

All right. Thanks.

Operator

Our next question comes from Corey Davis of Natexis. Please go ahead.

Corey Davis - Natexis Bleichroeder

Thanks very much and Acura deal a lot of people have asked about, I think it is intriguing. On one hand you're going to say you're going to be the only one who's going after the IR market with lots of competition in the extended release market. But on the other hand, you have to ask why has no one else chosen to go after the IR market with all the technologies out there?

Brian A. Markison - Chairman President and Chief Executive Officer

: Corey thanks for the question. I think one of the reason is the extended release market has certainly been a bigger dollar target market, and I think that's been a main driver here, plus the entire short acting market really doesn't have much in the way of intellectual property. So the average blended pricing is much lower, and I think that's the basic reason. But you know as John referenced before and I will let him answer this answer. There is a lot of short acting scripts being used in the chronic space, so John do you want to--

Unidentified Company Representative

Absolutely Brian and in addition with respect to the opportunities we continue to realize that from our primary research that having a brand with the good efficacy and a low abuse potential is the greatest unmet need in both segments of the marketplace, both the immediate as well as the strong opioid marketplace, so by having the accurate portfolio available to us, just helps us to maximize the overall opportunity.

Corey Davis - Natexis Bleichroeder

Then just one quick follow up. I could be wrong about this, but I think the majority of the oxycodone IR scripts have acetaminophen in there as well. So I guess so why was the single agent chosen as the first product to come out?

Unidentified Company Representative

If that is correct approximately 80% to 85% of the prescriptions currently do have acetaminophen but as you all know there is some concern with respect to acetaminophen containing products at this point in time. And having the ability to prescribe an immediate release product in conjunction with a long acting product, as stated before would be best served with a single entity agent as well. And I think physicians by and large in terms of what we are hearing from our research have demonstrated that their number one preference would be to have a single entity agent.

Corey Davis - Natexis Bleichroeder

Thank you. Thanks very much.

Operator

Our next question comes from Donald Ellis of Thomas Weisel Partners. Please go ahead.

Donald Ellis - Thomas Weisel Partners

Thank you very much for taking the questions. Obviously everyone is excited about this Acura deal. Can you talk a little bit about the technology and then quantify with respect to prescriptions written per year, the immediate market versus the controlled release market?

Brian A. Markison - Chairman President and Chief Executive Officer

Sure, Donald. Let me say first of all, we're not going to disclose at this time the exact ingredients in the Acura Aversion Technology platform. As I highlighted in the earlier remarks, there is a nasal irritant involved, there is obviously niacin which we have disclosed and there is a gel forming agent that when you subject the formulation to liquid whether it's water or alcohol, it actually forms a gel and becomes a viscous goo for lack of a better explanation. The prescriptions in the short acting market are around if you take 12 months data from IMS ending with this September the short acting prescription volume is around a 170 million Rxs and the long acting prescription volume is around 19 million Rxs.

Donald Ellis - Thomas Weisel Partners

Okay, so much larger market. Okay, I also think it was smart to leave out the acetaminophen and then you're limited by the four grams per day maximum for acetaminophen. My follow-up question is about REMOXY, can you discuss your level of confidence that you will or not face any patent litigation issues in the event that the product is ever approved by the FDA?

Brian A. Markison - Chairman President and Chief Executive Officer

Yes, thank you and what we've said before is that we believe that we have a non-infringing formulation.

Donald Ellis - Thomas Weisel Partners

Great, thank you very much.

Operator

Our next question comes from Angela Larson of SIG. Please go ahead.

Angela Larson - SIG

Good morning and thanks for taking the question. I was hoping you can give us a little more understanding of what was the simplification of the T-62 designs, the Phase II study design?

Brian A. Markison - Chairman President and Chief Executive Officer

Yes Angela, could you just restate the question? It came in kind of faintly please.

Angela Larson - SIG

Sure, could you give us greater clarity on how the Phase II study in T-62 was simplified?

Dr. Eric Carter - Chief Science Officer

Yes hi Angela, this is Eric Carter, the Chief Science Officer. And basically what we've done is just to simplify it by changing some of the inclusion criteria, modifying the dosing structure and also by removing some extraneous second re-end points that were making the study probably overly complicated.

Angela Larson - SIG

And was this motivated by the FDA's recent new guidance on pain development or just by your desire to get the study complete and done?

Dr. Eric Carter - Chief Science Officer

It was entirely motivated by desire to accelerate the entire program not by FDA guidance.

Angela Larson - SIG

Great...

Brian A. Markison - Chairman President and Chief Executive Officer

And Angela what we are trying to gain from this trial is a very clear proof of concept signal because our Phase I was very promising but in a very limited population where the original design was intended to just see if the drug was showing up in the CNS which it does. So now we want to make sure that our confidence is extremely high if we see the same sort of efficacy signal that we saw earlier.

Angela Larson - SIG

Great, thank you very much.

Brian A. Markison - Chairman President and Chief Executive Officer

You are welcome.

Operator

Our next question comes from Michael Rockefeller of Morgan Stanley. Please go ahead.

Michael Rockefeller - Morgan Stanley

Hi thanks for taking the question. Just wondering Brian what impact do you think Cephalon's new muscle-relaxant OMRIX will have on this market and if you think it all negatively impacts Skelaxin?

Brian A. Markison - Chairman President and Chief Executive Officer

Well I think there's one factor that we have to consider which is the fact that they have a sales force out there promoting the product. What I will be very interested to see is what does managed care do with that formulation versus generics, I think it's a very interesting test case to see. If managed care will give them a reasonable leverage position and remember they have zero data versus Skelaxin, so I am terribly worried about them promoting versus Skelaxin but again they will be out there with a share of voice that can't be ignored. The other thing is we look the package insert like anyone else can, and we were just not comfortable that there is a major advantage here other than the once-a-day dosage. So again I think it's we are on the wait and see mode to see what happens with this product, but it's an interesting test case.

Michael Rockefeller - Morgan Stanley

Thanks.

Operator

Our next question comes from Andrew Swanson of Citi, please go ahead.

Andrew Swanson - Citigroup

Thanks very much and I apologize if you mentioned this earlier. But I was hoping if you could address the manufacturing issues you had with the Altace tablets and let us know if those have been resolved.

Brian A. Markison - Chairman President and Chief Executive Officer

Yes Andrew there are no manufacturing issues with the tablets, it's just a matter of timing. And again when we initially made our plans to launch the tablet we obviously thought we had more exclusivity than the court was willing to go along with, so the only thing there is really timing and we've accelerated that timing quite a bit.

Andrew Swanson - Citigroup

Excellentand then is a follow up, the Meridian business seems particularly strong in the quarter. Is that of sort of a new run rate that we should be thinking about for that business? Thanks.

Joseph Squicciarino - Chief Financial Officer

Andrew no, this is Joe here. It's really not, I would like to be able to say it is the new rate but it's not. As you know there is some seasonality in that business when you look at the change versus previous quarters which is I recall is about $9 million, it's split 50-50 between EpiPen and government business. So we always have that variability that can be brought into the equation due to the timing of government orders as well as shipments to date for EpiPen.

Joseph Squicciarino - Chief Financial Officer

Thanks very much.

Stephen J. Andrzejewski - Chief Commercial Officer

You are welcome.

Operator

Our next question comes from Bert Hazlett of BMO Capital Markets, please go ahead.

Robert Hazlett - BMO Capital Markets

Thanks, I want to press the issue maybe a little bit on long acting oxycodone. You folks have been pretty aggressive in terms of defending your IP position with citizens petition and other things like that. Has there been any strengthening of the Purdue position to date and does your move into the abuse resistant... immediate release form signify any waning of confidence in terms of the timing to approval of the long acting forms of oxycodone? Thanks.

Brian A. Markison - Chairman President and Chief Executive Officer

Thank you for the question. No, no waning in confidence in fact, rather an even stronger belief that there is a real unmet need in subsequent market opportunity. Also on the Purdue Frederick side I haven't seen anything that would affect their position one way or the other. It's being... it's playing out right now with judge Stein. So that's a bit interesting but I really can't comment on anything they have done either beneficial or to weaken or strengthen their case.

Operator

Our next question comes from Ian Sanderson of Cowen, please go ahead.

Ian Sanderson - Cowen & Company

Yes thanks for taking the follow-up. First just a quick balance sheet book keeping. What assets are being booked is being held for sale currently in the balance sheet? And secondly just a follow up you mentioned that the Purdue patent issue is co-playing out with judge Stein. Can you give a littler more color on that?

Joseph Squicciarino - Chief Financial Officer

Yes Ian how are you? It's Joe. The held for sale is a transaction that was completed on the first, for our Parkdale facility with JHP, hence the need to classify as such it was after the quarter ended.

Ian Sanderson - Cowen & Company

Okay thanks.

Operator

Our next question comes from Greg Gilbert of Merrill Lynch. Please go ahead.

Gregory Gilbert - Merrill Lynch

I think you missed the end of last question on the judge Stein thing but my question is Joe, did I here correctly that EpiPen sales were about half of Meridian this quarter or was that a more general comment over time?

Joseph Squicciarino - Chief Financial Officer

Thanks for the question though. What I was addressing was the variant quarter-on-quarter, it's about a $9 million delta and half of that $9 million delta was due to EpiPen.

Gregory Gilbert - Merrill Lynch

Okay, maybe I can back into this but can you just give us what EpiPen sales were in the quarter?

Joseph Squicciarino - Chief Financial Officer

You know what let me, I will give you that a little later on in the call, I have to open up a binder to make sure I give you an accurate number. But after the next question I will give you the number.

Gregory Gilbert - Merrill Lynch

Sure.And part of my question on that is just remind us how the economics are split on EpiPen not with the specific number but just I don't know if you have ever disclosed how that works with Day.

Brian A. Markison - Chairman President and Chief Executive Officer

Yes no, we actually do not disclose how the economics transfer between us and Daylabs [ph].

Gregory Gilbert - Merrill Lynch

Okay, thanks.

Operator

Our next question comes from Angela Larson of SIG. Please go ahead.

Angela Larson - SIG

Thanks. On ACUROX thank you for the color that you expect to complete the Phase III in 2008. Should we also be expecting to see the Phase III data at least the top line of it before the end of the year?

Brian A. Markison - Chairman President and Chief Executive Officer

Angela I would love to answer that question with an affirmative but right now it's a little too early for us to give you that insight.

Angela Larson - SIG

Right thank you. And just for Ian, to bring back the judge Stein question if you wouldn't mind.

Brian A. Markison - Chairman President and Chief Executive Officer

Yes thank you Angela. We are trying to confirm it now, so don't hold me to it. But I believe that Purdue is in court with KV and Malincrot [ph] but I will look that up and if I am incorrect I will shoot you an email later.

Angela Larson - SIG

Great, thank you.

Brian A. Markison - Chairman President and Chief Executive Officer

Okay, thanks.

Operator

Our next question come from Kim Seth [ph] of Goldman Sachs. Please go ahead.

Unidentified Analyst

Hi I was just following up on the Purdue question, it's been answered. Thanks.

Operator

Thank you. Now let me give you back to Mr. Greene.

James E. Green - Executive Vice President of Corporate Affairs

Just want to thank every one for joining our call today. We appreciate your interest in King Pharmaceuticals, and we look forward to speaking with you again when we report our financial results for the year end 2007. Have a great day.

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