Alpharma, Inc. Q1 2008 Earnings Call Transcript

May. 5.08 | About: King Pharmaceuticals (KG)

Alpharma Inc. (NYSE:ALO)

Q1 2008 Earnings Call

May 5, 2008 8:30 am ET

Executives

Jack Howarth - VP of IR

Dean Mitchell - President and CEO

Jeff Campbell - President and CFO

Analysts

Gregg Gilbert - Merrill Lynch

Ian Sanderson - Cowen and Company

Tim Chang - FTN Midwest

Frank Pinkerton - Banc of America

Kim Sapp - Goldman Sachs

Scott Henry - Roth Capital

Operator

Ladies and gentleman, thank you for your patience in holding. We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of our speakers' presentation, we will open the floor for questions. Instructions will be given at that time on the procedure to follow if you would like to ask a question.

I would now like to turn this morning's conference over to Jack Howarth, Vice President of Investor Relations. Sir, you may begin.

Jack Howarth

Thanks, Chantal. Good morning everyone and welcome to our Alpharma's first quarter 2008 conference call. For today's call, we've provided a PowerPoint presentation to go along with our comments, and that's available on our website at www.alpharma.com. When you go to the website, click on the tab for Investor Support. In that section on the left, you'll see a tab for this presentation.

Joining me on the call today are President and Chief Executive Officer, Dean Mitchell and Executive Vice President and Chief Financial Officer, Jeff Campbell.

Going on to slide 1, before we begin, it's important to note, that in the course of this conference call, we will make certain statements relating to future events or future business performance, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our Safe Harbor statement as set forth in our SEC filings and in the accompanying slide presentation covers these remarks. The Company recommends that investor's review information in its SEC filings related to important potential risks and uncertainties including its annual report on Form 10-K for the year ended December 31, 2007.

In an effort to provide investors with additional information regarding Alpharma's financial results as determined by U.S generally accepted accounting principles or GAAP. The company has also provided certain non-GAAP information which management utilizes in its analysis of its business and which it believes also provide useful information to investors. This information includes earnings before interest, taxes, depreciation and amortization. The Company discloses this information to assist investors in understanding the impact of these items on the Company's financial results and the earnings generated by operations that the Company believes can be more meaningfully compared with prior periods and forecasts. A reconciliation of reported to adjusted results for continuing operations for the three months ended March 31, 2008 and 2007, is attached to our earnings release.

On slide 2, we've laid out an agenda for today's call. Dean will begin the call with some overview comments; Jeff will then review the financial results for the quarter; and Dean will make some closing comments.

With that, I'll turn the call over to Dean.

Dean Mitchell

Thanks, Jack. Good morning, everyone. Thanks for joining us this morning. Earlier today we reported strong first quarter results, which I'll review and then Jeff will go into more detail on the financial aspects of our results.

On slide 3, in the first quarter we reported EPS of $3.77, which included the gain from the sale of the API business. Excluding the gain, and excluding the $37 million clinical milestone payment made to IDEA for progress made in ketoprofen in Transfersome gel program, the diluted loss per share from continuing operations was $0.05. For the first quarter of 2008, revenues from continuing operations grew 33%, and operating margins reflect targeted investments in SG&A.

Our pharmaceuticals business had strong revenues with growth of 91% in the quarter, given large part to the successful launch of the FLECTOR Patch, which had revenues of almost $25 million. In addition, KADIAN prescriptions increased over 10% versus first quarter of 2007 with revenues increasing $7.2 million or 21% to $41.7 million.

In the quarter, we once again made significant investments in both R&D and SG&A, including continued investments in our abuse-deterrent platform as well as payments based on the achievements of clinical milestones through our partner IDEA for ketoprofen in Transfersome gel.

The increase in SG&A investment was in large part related to the doubling of the size of our sales force in preparation for the January 2008 launch of the FLECTOR Patch, as well as advertising, promotion and other related costs to support the launch.

Animal Health revenues grew 9% to $91.5 million for the quarter, primarily attributable to growth in most regions and market segments. Also operating margins were right around 19% for the quarter reflecting on our ongoing commitments to address the challenges of rising input cost in the Animal Health business.

From the scorecard perspective, we launched one new product, got three approvals for new indications and product combinations, and received 12 approvals to sell existing products in new regions. Another solid quarter for the Animal Health business.

So turning to slide 4, I'd like to spend a minute on the FLECTOR Patch launch. One of the most significant accomplishments in the Alpharma transformation plan last year was the addition of the FLECTOR Patch to our pain portfolio. This slide covers the 14-week period since the mid-January launch.

The initial interest and feedback on the FLECTOR Patch is been quite positive from both patients and physicians. We have high awareness of the product and recall of our key messages and have almost 20,000 physicians, who've prescribed FLECTOR Patch thus far.

We continue to work with managed care organizations to get FLECTOR the appropriate formulary coverage, and we are in active product review and contrast in discussions with plans across the country. We're also continuing to ramp-up promotional activities and our commercial team is working to refine our messages and redefine some of our target positions based on prescription data we received to date. We recently increased our target physicians based on analysis of initial prescription trends for example.

In summary, we're pleased with the prescription generation to date and continue to see further potential for FLECTOR in the market. We will continue to evaluate the appropriate level of investment to maximize the full potential of this product over the years to come.

Moving on to slide five, last November we announced positive results from the Phase III trial of our abuse-deterrent extended release opioid, EMBEDA. The primary endpoint was agreed with the FDA through a special protocol assessment, and the outcome of the Phase III trial was statistically significant. Results from this pivotal trial in the long-term safety trial indicated that adverse events associated with EMBEDA were comparable for those associated with KADIAN. We believe that the results from our EMBEDA clinical trial program will lead to an enhanced dataset which will be considered for inclusion in the product label. Therefore, prior providing additional selling messages, as part of our switch strategy from KADIAN to EMBEDA.

We believe EMBEDA is truly an abuse-deterrent product, not just a tamper resistant product. While premature to discuss the merits of the entire launch strategy, suffice it to say, we are pleased to be able include both efficacy and safety data, as well as Euphoria Abatement studies which show the impact if EMBEDA is abused in our submission.

Speaking about submission, we announced two weeks ago, the withdrawal of that submission due to technical issues around data presentation, which would have prevented a complete and timely evaluation by the FDA within a six-month priority review period. These issues relate to the way the data was presented, not the data itself. We are fully committed to working with the agency to address these technical issues and plan to resubmit the application in approximately two months, and expect to requalify for a priority review.

Most importantly, we still continue to anticipate the first quarter 2009 launch in EMBEDA. Potentially the first morphine based abuse-deterrent product, which we believe will offer patients with chronic pain and the physicians who treat pain a broad dosing range in the opioid category.

Turning to slide six, let me briefly review our first quarter 2008 scorecard. With respect to our first quarter results, we delivered in line with our commitments, primarily due to the early success of the FLECTOR Patch launch and continued targeted investments in our pharmaceuticals and animal health businesses.

We announced record first quarter revenues of $66 million for our pharmaceuticals business. In addition to the launch of the FLECTOR Patch, we are pleased with a 10% prescription growth of KADIAN versus the first quarter of 2007. Our goal was successfully launching one product, while growing the existing KADIAN franchise was an important one, and we believe the additional detailing of the product by both the new and existing sales representatives is starting to have an impact.

The animal health business also had a very busy quarter growing revenues over 9% and continuing to develop the portfolio with new products and indications. Delivering on our commitments to create value for shareholders, we divested the active pharmaceutical ingredients business and realized net after-tax cash proceeds of approximately $365 million, which we plan to use primarily for measured investments in both pharmaceuticals and animal health businesses, as well as in a recently announced share repurchase program, which gives us additional investment flexibility, should our shares remain undervalued.

With that I'll turn it over to Jeff, who'll take you through some of the details of our first quarter results.

Jeff Campbell

Thanks Dean. Let's turn to slide seven and I'll walk through the components of our earnings per share for the first quarter. I'll start with our discontinued operations. We are reporting all current and prior period results of the Active Pharmaceuticals Ingredients as a component of results from discontinued operations.

During the first quarter of 2008, API revenues declined about 14% from first quarter 2007 levels and operating income declined about $10 million, from $12.5 million in the first quarter of 2007, to $2.4 million in 2008. As a result, the operating component of EPS from discontinued operations declined to $0.01 in 2008 as compared to $0.20 in last year's first quarter.

We closed on the sale of our API business on April 1st, with the transaction closing affected as of the close of business on March 31st. As a result, we've included the gain on the sale of the API business in our first quarter 2008 results, and reported a net receivable due from the purchaser on the balance sheet at March 31st.

We recorded a net after-tax booking on the transaction of $201.5 million. These results in earnings per share related to the gain of $4.66 and a total first quarter 2008 EPS from discontinued operations of $4.67. I should also note, with respect to the gain that the API sale contract calls for certain post closing adjustments. These may result in certain modifications to the gain recorded in the first quarter.

Moving on to our continuing operations. On an overall basis, we reported a loss per share of $0.90. This includes $37 million or approximately $0.85 of EPS in research and development expenses accrued in the first quarter for the successful achievement of the first two progress milestones related to the development of ketoprofen in Transfersome gel. Both of these milestones were made paid in April. However, since they were achieved in the first quarter, the associated R&D expense was accrued at March 31st.

Excluding these R&D milestones, our continuing operations contributed a loss per share of $0.05 in the first quarter of 2008, compared to earnings per share of $0.08 in the first quarter of 2007.

As I will review in more detail in a few minutes, the first quarter 2008 loss is a result of the significant investments in selling, general and administrative expenses in our pharmaceutical business, in support of the FLECTOR Patch launch and the expansion of the franchise. On a consolidated basis, combining both the results from our continuing and discontinued operations, we reported first quarter 2008 EPS of $3.77.

Let's turn to slide eight, and I'll review our first quarter performance from our continuing operations in a bit more detail. Revenues from continuing operations totaled $157.5 million, an increase of 33% over the first quarter of 2007. As Dean noted, the most significant driver of this increase was the revenues generated from the January 2008 launch of the FLECTOR Patch. However, we also had strong revenue growth of our KADIAN product, and in our animal health business.

Our gross profit increased by 37% to just under $100 million in the first quarter, and as a percentage of revenues, our gross profit was 63% in the first quarter of 2008 versus a gross profit percentage of 61.3% in last year's first quarter. The increase in the gross profit percent reflects the expansion and higher growth rate in our higher margin pharmaceuticals business.

SG&A totaled just over $90 million in the first quarter of 2008, an increase of $35 million compared to the first quarter of 2007. The increase principally relates to our pharmaceuticals business, and reflects more than doubling the size of our sales force and other investments to support the FLECTOR Patch launch and continued growth in this business.

As a percentage of revenues, SG&A amounted to 57.4% in the first quarter of 2008 versus 46.7% in 2007. I will comment a bit more on the first quarter investments in SG&A in a few minutes. Excluding the $37 million and accrued research in development milestones, R&D expenses in the first quarter of 2008 declined slightly to just over $14 million or 9% of revenues.

This decline reflects more clinical spending in 2007 for a Phase III clinical work on EMBEDA. Overall, excluding product licensing milestones, we continue to target 2008 R&D spending as a percentage of revenues in the range of 10% to 12%. Operating income excluding the R&D milestones, decline to a loss of $5.3 million in the first quarter of 2008 compared to income of $4.4 million in 2007.

This decline of about $9.5 million reflects the significant SG&A investments in pharmaceuticals largely offset by the increase gross profit on a higher first quarter 2008 revenues. With that overview, please turn to slide nine and I will review the financial performance of our two continuing businesses.

Pharmaceuticals revenues increased over 91% to $66 million in the first quarter of 2008 in comparison to the same period of 2007. These are record quarterly revenues for this business.

The growth is, of course, principally driven by the launch of the FLECTOR Patch. First quarter, FLECTOR Patch net revenues totaled $24.3 million. These revenues include all our product shipments during the first quarter of 2008, plus the $3 million of revenues we deferred at the end of 2007. In order to put this in perspective, our first quarter revenues reflect script demand throughout the quarter plus the initial stocking of pharmacies and our wholesalers.

Based on Wolters Kluwer Health data, our first quarter FLECTOR Patch prescriptions totaled about $78,000, and our average script size was about 45 patches, or about three weeks of therapy. This resulted in net revenues related to actual script demand in the quarter of about $13 million or about $170 per script. This net revenue value for script reflects the initial cost of auto shipment and stocking programs, but does not yet reflect any rebates that we anticipate from our negotiations with managed care plans.

The remainder, approximately $11 million of our first quarter 2008 FLECTOR Patch revenues, relates to the initial stocking of pharmacies and our wholesalers. This is split roughly 50/50 between the two. Our initial retail stocking and auto-ship programs enabled us to get good early coverage of a large base of pharmacies. In addition, on a trailing demand basis, we ended the quarter with under a month of FLECTOR Patch inventory in the wholesale distribution channel.

In addition to the launch of the FLECTOR Patch, our KADIAN product revenues were strong in the first quarter, up 21% versus the comparable quarter in 2007. This reflects both volume and price gains. In comparison to the first quarter of 2007, our KADIAN prescriptions grew at just over 10% in the first quarter of 2008. In addition, on the pricing side, we instituted a 9% price increase on KADIAN in early March.

We continue to aggressively manage our wholesale inventory levels for KADIAN and ended the quarter with inventories below 1.5 months on hand, down about 4 days from year end. This is a conscious strategy as we move closer to the anticipated launch of EMBEDA.

As we previously discussed, our pharmaceutical results in the first quarter included $37 million of R&D expense associated with the accrual at March 31 for the successful achievement of the first and second milestones related to the clinical advancement of ketoprofen in Transfersome gel. We paid both of these $18.5 million milestones in April.

Excluding these milestones, pharmaceuticals R&D expense was down slightly versus for first quarter 2007 levels, principally as a result of greater clinical spending in 2007 related to the EMBEDA Phase III program.

First quarter 2008 selling, general and administrative spending in the pharmaceuticals business, increased $35 million over 2007 levels. The increase reflects investments to support both the launch of the FLECTOR Patch as well as to support the expansion of a more diversified and growing pharmaceuticals business, and includes a full quarter's impact of more than doubling the size of our sales force, and the cost of engaging a contract sales organization, the initial launch and launch meeting costs, and other advertising and promotion in support of the FLECTOR patch, the cost of FLECTOR patch product sampling and investments in G&A to support the growth of our pharmaceuticals business, including facility expansions and compliance programs.

Overall, while there are certainly our variable components in our SG&A costs, our outlook for the remainder of the year is to continue to increase revenues and to leverage the investments being made in SG&A.

Moving to slide 10, let's review our first quarter performance in the Animal Health business. We entered the first quarter of this year coming of a record 2007 fourth quarter in our Animal Health business, for quarterly revenues exceeded $100 million for the first time and we're up 8% versus the fourth quarter of the prior year.

The first quarter of 2008 has continued at very strong levels with revenues increasing 9% versus the first quarter of 2007. Excluding the effects of currency, the year-over-year revenue gain was 6.4% reflecting increasing sales across most geographic regions and in most of the market segments we serve.

Our margins in this business continued to be strong, amounting to 18.6% in the first quarter of 2008. This level compares favorably to the first quarter of 2007, where operating margins were just under 18% after excluding the benefits of certain asset sales and closed facility exit cost adjustments.

The year-over-year improvement in comparable operating margins was achieved despite continuing input cost pressures. We experienced more than 20% year-over-year cost increases and certain of our key (inaudible) purchase costs including corn, soy and whey. This is a continuing challenge for the business.

During the quarter, foreign exchange had a slight favorable impact on Animal Health gross margins. More significantly, the business was able to address the impact of these rising input costs through continuing productivity improvements programs combined with targeted price increases. Animal Health also increased its investments in R&D by just over $1.5 million in the first quarter and supported its continuing new product development initiatives.

On slide 11, we have laid out certain other key financial data. We ended the quarter with a strong financial position. Our cash balance at March 31 was $276 million, however, this increased significantly the next day. On April 1st, we closed on the sales of the API business, and received cash of just under $385 million.

The final sales price is subject to adjustment, based on the terms of the agreement to reflect item such as a closing net cash balance, and working capital of the business. We expect this to occur, in the second quarter, and continue to expect the net after-tax cash proceeds of this transaction to approximate $365 million.

In addition to the receipt of the API sale proceeds in the April, we paid the two R&D milestones to the licensor of ketoprofen in Transfersome gel. Factoring in these April events, our cash position approximate $622 million more than 50% greater than our cash position at this time last year and our debt consisting principally of our convertible notes continues at just over $300 million.

As Dean noted, we continue to seek business development opportunities to invest our available cash in both of our businesses. In addition, we continue to evaluate the opportune time to repurchase shares under our previously announced share repurchase program of up to $150 million.

At the bottom of the slide, we have included certain other financial metrics for our continuing operations to help you with your models. Depreciation and amortization for continuing operations amounted to $9 million in the first quarter of 2008 compared to $8 million in the same quarter of 2007. Capital expenditures totaled $2 million in 2008 compared to $4 million in 2007.

We continue to be very focused on cash generation and in the first quarter of 2008, we generated approximately $5 million of EBITDA from continuing operations, despite the significant investments we made throughout the quarter.

One other element of our financial results on which I should comment is our income taxes. During the first quarter, we recorded a net income tax benefit of $2.6 million. This includes no book/tax benefit on the $37 million of R&D expenses accrued in the first quarter related to ketoprofen in Transfersome gel. We have licensed this product through a newly established subsidiary in Ireland and are making the milestone payments from that entity. Since we have no earnings history in that subsidiary, we are establishing a full valuation allowance against the deferred tax assets generated by these milestone payments, and as such, realize no current book/tax benefit for the expenses.

Excluding the $37 million of R&D expenses and comparing the $2.6 million in book/tax benefits recorded in the first quarter to our loss before income taxes, results in a first quarter effective tax rate of approximately 56%, quite a bit higher than the US statutory rate.

There were a few factors influencing this rate, including certain international jurisdictions, such as Ireland, where we project losses in 2008, for which we expect to report no tax benefits. In addition, certain tax benefits realized in prior years, such as the US R&D credit, which is yet to be approved, that are not reflected in the 2008 tax rate.

Tax effects of each of these items are not individually that significant. However, when the combined effect is applied to a relatively low pre-tax earnings number in absolute terms, we see the effects of the law of small numbers, which results in significant swings in the effective tax rate.

Now let’s turn to slide 12, and review our financial outlook for the full year. The assumptions underlying our outlook remain unchanged from our release on April 14. As a result, we are reaffirming our 2008 full-year financial outlook for our continuing operations. We continue to project year-over-year revenue growth of 30% to 35% and earnings per share in the range of $0.15 to $0.35.

This outlook excludes the earnings per share impact of any potential milestone payments associated with our 2007 licensing agreements and any future business development transactions. In addition, any potential share dilution from our convertible notes and stock warrants is not reflected in this outlook.

Thanks for your attention and I will now turn the call back to Dean.

Dean Mitchell

Thanks Jeff. Turning to slide 13, the first quarter has been a very active time for us, and our numerous accomplishments have helped to refocus the business, simplifying and strengthening our business model. We have a lot of work to do in order to maintain the successful launch trajectory of the FLECTOR Patch and we have begun refine our methods, physicians and patients as well as analyzed prescription writing habits, in order to take prescription growth of the FLECTOR Patch to the next level. Our regulatory team is working vigorously to resubmit the EMBEDA New Drug Application in the next couple of months, and we expect to requalify for a priority review.

As we have all seen from the FDA's briefing documents released in advance of today's advisory panel meeting, the agency is anxious to review abuse-deterrent products that will address the growing problem of opioid abuse in our country, and we're committed to developing a solution to help this problem, not only with our EMBEDA resubmission, but with our entire abuse-deterrent platform.

We're also working with the FDA to finalize a special protocol assessment to ketoprofen in Transfersome gel, which is due to commence Phase III trials later this quarter. And finally, with the closing of the API transaction, our business development teams are working to find opportunities for both the pharmaceuticals and animal health businesses. So overall, we believe we have developed a great foundation for value creation and continue to create near term opportunities to position Alpharma for long-term growth.

Thank you for your attention; I'll now turn the call back to the operator so we can address your questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Our first question will from Gregg Gilbert, Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks, good morning. Starting with EMBEDA, Dean, can you provide more specific color on the technical issues around the data presentation that delayed the NDA? And secondly, I know you haven't decided on the specific launch strategy for EMBEDA yet, but is there any technical reason that you could not cease manufacturing KADIAN to accelerate and switch to EMBEDA, if that's what you chose to do?

Dean Mitchell

Good morning, Gregg. Thanks for the question. The technical issues really relate to the fact that we had certain agreements with the agency ahead of time, around how data would be presented, which in the context of a full review, would have been just fine. Once they decided it was going to be accelerated review, the agency made the policy decision that it had to be absolutely complete, and the data presented in every aspect that allowed them to do a full review within that compressed time, allowed under a priority review. So it's literally a matter of us reformatting and re-presenting some of the data, which is going to take us a couple of months that I talked about, that we expect to take and until we resubmit.

Then the second part of our question, you are absolutely right. We are still working on what our launch strategy is going to be. And I think part of the question is really, do we see a place in the market place for both KADIAN and EMBEDA? I think you can make a pretty good case that if EMBEDA is truly a less abusable product, the right ethical thing to do, probably would be, to withdraw KADIAN from the market. But we want to make sure that physicians are absolutely comfortable with using EMBEDA before making that decision around KADIAN.

Although there maybe a regulatory aspect to that, and we really don't know quite how the FDA is going to think about these products, I suspect, we are all going to learn a little bit more about that in the next 24 hours, as they review the product that our friends at Perdue have submitted.

Gregg Gilbert - Merrill Lynch

Thanks.

Dean Mitchell

Thanks Gregg.

Operator

Thank you. (Operator Instructions). Our next question will come from Ian Sanderson, Cowen and Company.

Ian Sanderson - Cowen and Company

Hi. Good morning. Thanks for taking the question. Could you spend, Jeff, a moment on what you're seeing competitively in the topical analgesic market? And secondly, you noted that you're increasing the target physicians for FLECTOR Patch. Should we expect to see sequential increase in SG&A spending around that and maybe if you can talk about exactly how you plan to affect that expansion?

Dean Mitchell

Yeah. Thanks, Ian. I'll start actually with the topical market and then ask Jeff to talk about the SG&A projections through the year. In terms of the competitive market, I think what we've seen is really exactly what we expected, which is the market is being very receptive to a topical approach which has much lower systemic levels of the drug than orally provided therapy.

It's a message that's resonated well with physicians. They've reacted well to the adverse events stated we put in our sales and promotion material. So really they're making or drawing the conclusion that these products are safer than the oral options available. Obviously, this is still a men said still has a black box. We're not promoting safety directly but physicians are drawing that conclusion.

So if you then look at the option or the potential for topical therapy to grow over the next several years, we are expecting that there will be a number of new competitors over the next several years. We've already seen the launch of already seen the launch of a gel product from Endo, which is addressing a slightly different indication. But from our point of view we're pleased that there are now two companies out there talking about the benefits of topical therapy. And we believe that in our own development program we have a potentially more attractive gel product, which will compete directly with the Voltaren gel.

We're hearing continued positive response in reaction to our messages. As I've mentioned, we are fine tuning them slightly but essentially the messages we went out would really seemed to be the right messages in terms of target audience. Jeff, do you want to talk about the SG&A a bit?

Jeff Campbell

Sure. Good morning, Ian. From an SG&A perspective, I would not expect to see sequentially increasing SG&A in absolute terms. So what our outlook assumes is a bit heavier spend in SG&A in the first half of the year than the second half of the year. And then in terms of leverage, our outlook assumes continuing growth in revenues so that we leverage that SG&A as sequentially as we move throughout the year.

Ian Sanderson - Cowen and Company

Okay. And just in general terms, how you plan to expand from that 20,000 darts targeted – what are the means by which you would do that?

Dean Mitchell

Yeah. Again, fair question, Ian. And I think that we're still in relative early stage of a launch. We're a quarter into it and we have done a lot of the traditional things. We've had lot of good selling programs in place. We had good efforts by our medical affairs teams working through the formulary issues.

So I think the next phase is really all about cementing the formulary position across the country. I think as we said at the launch time about the second quarter after launch would be the time when a lot of that negotiation came to conclusion, and we were exactly where we expected to be on the managed care side. We still have completely free access to over half of the plants in the country, so no restrictions on the product, which I think puts us in a pretty good position.

We're also ramping up a whole number of our other promotional programs. As you know, it takes a bit of time to get opinion leaders trained to go out and speak out on behalf of your product. We did that during the first quarter. And during the second quarter, we got a lot of those types of programs starting to run. So really it's very much just a matter of continuing to ramp-up the promotional efforts and continuing with the things where we've done well, refining the messages slightly and continuing with the heavy lifting that goes on with the topical product launch.

Ian Sanderson - Cowen and Company

Thank you.

Dean Mitchell

Thanks, Ian.

Operator

Thank you. Our next question will come from Tim Chang, FTN Midwest.

Tim Chang - FTN Midwest

Hi, thanks. I was looking at the prescription trends. I mean they seem to have flattened up a little bit for FLECTOR and I wanted your thoughts on, if the IMS data was relatively accurate here or not. I mean what are you guys seeing out in the channel in terms of demand for FLECTOR? And have you seen some share being taken away via Endo's Voltaren gel, at this point?

Dean Mitchell

Reasonable question, Tim. I think the way we tend to look at the data is you've got to look at the trend over the 14 weeks or so that we've been out there. And individual weeks will be up and down a little bit. That's partly reflected in what happens in terms of holidays and certain weeks, partly reflected in some of the inaccuracies and the data collection.

So we don't get too excited about individual weeks. We're much more interested in the overall trend. And the overall trend continues to be pretty positive. We've seen Voltaren gel take a little bit of market share, it's very early in their launch yet. And we really don't seem to have seen much cannibalization of FLECTOR prescriptions. It seems to be coming actually from different physicians, which again says something about the potential to grow and develop the market.

It certainly has a very different set of indications and we know that Endo is promoting it for a different set of indications than FLECTOR Patch. So as I said, we're quiet happy to have two companies out there talking about the benefits of topical therapy.

Tim Chang - FTN Midwest

And have you seen much of late, what you see at this point? I know it's still pretty early in the launch.

Dean Mitchell

It's actually quite difficult to say because we really got such a broad label for FLECTOR Patch. Strains, sprains and contusions really covers all of those most acute pains situations. So, I think given that broad definition of the label -- I think as far we can tell, virtually all of the usage is on label.

Tim Chang - FTN Midwest

Okay. Great. Thanks.

Dean Mitchell

Thanks, Tim.

Operator

Thank you. (Operator Instructions). Our next question will come from Frank Pinkerton, Banc of America.

Frank Pinkerton - Banc of America

Hi. Great. Thanks for taking the question. Just wanted your opinion on some of the wording in the response on the FDA are back to Perdue, especially regarding abuse-deterrent medication and how the FDA may comment that they would include physicochemical descriptions to the product in the label, but was very hesitant to give abuse-deterrent status to a product until close community-based observational studies were done.

Where do you guys stand with something like that and how do you view the FDA addressing your drug with these kinds of responses?

Dean Mitchell

Yeah. Good morning, Frank. Thanks for that question. It's certainly a very topical question. We were delighted with respect to the FDA. It's exactly consistent with what we've been saying for a while, which is, the FDA is not going to give a direct indication for abuse-deterrents and what they are really saying is you have to demonstrate how these products are abused in the real world before they would even consider that, which I think is an appropriate, prudent, perspective from the agency.

What I did find very encouraging though is, if you think about the sort of work that we've been able to do with EMBEDA, particularly the euphoria or abatement studies for example, I would say that gives us high expectation that we are going to be able to get quite a lot of that type of data, quite a lot of the data around Naltrexone, perhaps some of the Phase II data that we did comparing EMBEDA with KADIAN To get that type of information into the label, which really allows us to tell a very interesting story about what I think may end up being the first true abuse-deterrent product, as opposed to some of these tamper resistant forms, which are being developed by other companies.

I think the one other interesting thing from the briefing documents is, how challenging the FDA is finding the whole labeling issue? And I'll be intrigued today and see how they are going to deal with the fact that the due have only got part of their product range because they buy this new tamper resistance formula and how they are going to deal with that issue, which I think posses real challenges both from a labeling point of view and from a prescriber point of view, quite honestly.

Frank Pinkerton - Banc of America

And I guess just a the follow-up there and maybe I'm reading into the FDA document and maybe a little swing on an earlier question on this call, but it almost appeared when the FDA was talking about certain dosage strengths, that it seemed that they didn't have an abuse-deterrent medication for set apart and kind of set those out. But the question here is as the FDA looks at these products, do they actually require removal of old products that would be inferior from an abuse deterrent standpoint, because especially if you look at some of the following remarks for the May 6 meeting, it's very much a concern from a social standpoint with the FDA now?

Dean Mitchell

Yeah. And again, Frank, I think we are going to learn a lot more from today’s discussion and then subsequent dialogues that we have once we’ve resubmitted our NDA. And I think, we are just going to see how this evolves over the next six to 12 months. As I said to the question asked earlier, I think it was Gregg who asked it, it’s not absolutely clear what position the FDA will take on this. And you have two groups in the FDA who are going to be looking at this. You are going to have both the reviewing division and the safety group. So again, remember that today’s jointly sponsored meeting between the clinical division and the safety division and I think it is going to be very interesting to see what sort of risk management plans are put in place and how aggressively the agency wants to try and help move them the market towards abuse deterrent forms of the drugs. So we will see.

Frank Pinkerton - Banc of America

Okay, great. And then, just a last one, and I always kind of struggle here, but can you just give us a little more color on some of the products launched on the animal health side? I know you also had a lot of products, 16 expanding into new markets, can you give us what some of those products are, what the potential market or impact on growth some of those would have on that division? Thank you.

Dean Mitchell

Yeah. Thanks, Frank. We tend not to talk about the individual products too much, because each of them contributes a relatively small amount to the overall development of the business. And the way we think about this is, it takes several years for each of those line extensions to through the peak sales. So really it's much more a momentum created by a range of line extensions, if you wan to think about it that way. They have launched one interesting new product which is a complimentary product to our poultry business, which is our first move outside MFAs in the poultry business. But again, we don’t talk too much around the specific individual products.

Frank Pinkerton - Banc of America

Great thank you.

Dean Mitchell

Thanks Frank.

Operator

Thank you. Our next question will come from James Kelly, Goldman Sachs.

Kim Sapp - Goldman Sachs

Hi it's [Kim Sapp] for Jim Kelly. Thanks for taking the question. A couple of quick questions on cost, and then one on product. For the R&D spend, given the annual guidance for R&D at 10% to 12% of revenues and the current quarter's 9%, what do you see over the rest of the year to boost R&D into the guidance range?

Dean Mitchell

I think that’s a good one for Jeff to say.

Jeff Campbell

I think of a couple of different areas. Certainly investments in medical affairs, both in (inaudible) and Scientific Communications, medical scientific liaisons and built in the topical NSAID market, as well as we move through the year preparing us for the launch of EMBEDA. In addition, further building out our abuse-deterrent platform as we move through our pipeline and make investments in the pipeline during the year. So with that said, our assumptions are still at 10% to 12% of revenues with respect to R&D.

Kim Sapp - Goldman Sachs

Okay great. And then on the gross margins, real quick. With the guidance from 61% to 63%, you hit the top end of the range this quarter. Are there any specific factors that you see pressuring margins through the rest of the year, for instance in perhaps animal health given the higher production costs?

Jeff Campbell

I think the one thing to note in the first quarter performance is that we called out in our comments, the average value for a FLECTOR Patch script was toward the $170 range. We are still in early part of negotiations with managed care and the like. So as we go through the year, our gross net on FLECTOR Patch may evolve a bit, and we may not run at that level. So that had a favorable impact on our gross profit margins in the first quarter. And again, we still think that 61% to 63% range is a good assumption as we move through the year.

Kim Sapp - Goldman Sachs

Okay. And finally just on the ketoprofen in Transfersome gel. Can you just go a little bit more into how you see this bidding strategically with FLECTOR product, and you mentioned potentially different physicians are being called upon for Voltaren time or prescribing Voltaren, which is maybe more directly competitive in some ways to ketoprofen gel? Could you talk a little bit about how you see that shaping up? Thanks.

Dean Mitchell

Actually, it's a great question. Very timely, as we think about our Phase III development program, clearly both the Voltaren gel and our own ketoprofen gel is developed for different indications. So it's pain associated with osteoarthritis. It's a gel, it appears and suddenly the feedback we are getting from physicians seems to be preferred in certain joints, which is obviously much more relevant to osteoarthritis pain, so particularly knees, fingers, toes. Although, I have also had fair amount of feedback that the Patch fits surprisingly well to knees, so there is little bit of overlap there, perhaps.

So I think clearly the indications, clearly the parts of the body, the two different presentation forms that are used in will separate them, and then I think the big difference comes down from the fact that physicians and patients, some just have a preference with one form versus the other. So I think as we see the whole topical market develop, I think we will see segmentation within that market, which will happen as we see really the growth of a whole new market segment within NSAID therapy.

And I think, one thing to just remember is that we are currently seeing, as you think about our defined universe, which is oral NSAIDs, oral COX-2s and LIDODERM Patch. If you think about that as our competitive market, right now with FELCTOR Patch even with prescriptions running at almost 12,000 a week we're still at less than 1% market share in terms of total prescriptions, about 0.75 a share point.

So I think there's a lots of room to grow this whole topical approach to the market. And you confirm your other conclusions about where you think that might top out, but we're certainly thinking a high single-digit is reasonable to expect this market developed over the next number of years.

Kim Sapp - Goldman Sachs

Great. Thanks. And if I may, just a follow-up in terms of the different physicians, does this mean that you may have to extend your current sales force in some way in terms of who they touch in order to address a new physician population to get leverage?

Dean Mitchell

Again, it's a little bit early for us to make any conclusions about that when we build our sales force size, when we licensed in FLECTOR Patch, we actually based it on the right sales force size to launch FLECTOR Patch on EMBEDA. We still believe that's the case. Obviously, we're learning more as FLECTOR Patch is rolled out. But right now, we think that's the case. And as we get closer to the opportunity to launch ketoprofen gel, we'll be reevaluating that.

Kim Sapp - Goldman Sachs

Thank you.

Dean Mitchell

Thanks.

Operator

Thank you. Our next question will come from Scott Henry, Roth Capital.

Scott Henry - Roth Capital

Thank you. First just on KADIAN, as they track it out and look at revenue per script, which did get down in Q1, I guess that could be indicative of few things such as wholesaler, destocking, any comments on how we should think about revenue per script for KADIAN? And also, if you could just remind me when the most recent price increases were for that product?

Dean Mitchell

Yeah. A good Jeff questions I think.

Jeff Campbell

Good morning, Scott. There are a couple of factors. If you look at revenue dollar for per script for KADIAN in the first quarter, it's a bit closer to where we were in the third quarter of last year, and why we're down from the fourth quarter is two factors coming to mind. First, we did bring the channel down. We brought about four days in the channel down and when you do, that is simple math that has a pretty big impact on that.

And we did that in the context to your second question of we took a price increase of 9% in early March. So the combination of that bringing the channel down has a big impact on the revenues per script. In addition, the TriCare rebate was passed into law in the first quarter. And that's reflected in our gross-to-net. So that has an impact on our revenue per script. But if you really do the sequential, it looks a bit more like the third quarter of '07 right now, where we are in the first quarter.

Dean Mitchell

Scott, just to build on your question, I know didn't ask this specifically but we were pretty pleased to see the 10% prescription growth year-over-year. And particularly during the period when we were launching FLECTOR Patch, and we had tremendous emphasis on that, we were just aware that we might have seen a drop-off in KADIAN. We certainly haven't seen that.

And as our new representatives and the people we recruited as we double the size of the sales force, get more and more comfortable with the opioid space, I think we're really going to see the traction of that that expanded reach we'll have.

Scott Henry - Roth Capital

Thank you. And I appreciate color on that. My second question relates to the Transfersome gel. And I guess as we get closer on that product people will start compare and contrast it versus the Volteran gel. I believe it's a twice a day versus Voltaren being a four times a day gel.

But additionally, I was hoping you could provide color with regard to the amount of gel a patient has to use. I believe the Volteran gel is labeled for up to 32 grams per day, which seems like a lot of gel. And I am wondering is the Transfersome gel, is it a more efficient gel? Do you expect volumes to be in the same level, if you have any color on that?

Dean Mitchell

Yes I think you really hit the main differentiation here, which is it's going to be twice a day rather than four times a day, which I think from a patient convenience point of view is very significant. I have trouble remembering anything more than twice a day in terms of therapy. So I think four times is pretty tough, particularly when you have to apply to parts of the body.

So it's not easy to undress when you're in the office. So I think the exact amount of drug, I think it's a little bit early to tell until we've completed the Phase III study. So I think that might be something that we give you more of an update on this as we get that clinical experience.

Then the one another thing just to remember is that the Transfersome aspect itself is quite an important part of differentiation. There is some good signs with them straight so that we have an active carrier mechanism that carries the inset across the skin barrier somewhat bypassing the subdermal vasculature. If we can confirm that in more clinical work, I think we'll have actually a very good scientific story as well as just the patient preference based on convenience. So I think we'll have a number of folks to way out and differentiate the product.

Scott Henry - Roth Capital

Thank you both for taking the questions.

Dean Mitchell

Thanks, Scott.

Operator

Thank you. Our next question will come from Gregg Gilbert, Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Hi. Just one more on strategic follow-up. Given the accretion of share repurchase of these prices, can we assume that you see near-term transactions that can generate a better return than share repurchase? Another, do you kind of looking at one versus the other?

Dean Mitchell

I think yes we are Gregg obviously. But at same time, we are also trying to strategically build the business. And I think as we demonstrated last year, if you are doing deals in the pharmaceutical space, you have to be bold enough to take a little bit of short-term accretion, dilution rather, to get the longer term accretion.

I think Jeff told the length, when we actually the announced the closing of the API deal, that we were going to use the cash for two different things. We are going to use it to build the business, but also to have it available as an option for share buyback. And we continue to view that as an attractive option, while our share price is relatively at a low level. Certainly below what we think the value of the company is.

Gregg Gilbert - Merrill Lynch

And Dean, depending on what happens in the next couple of days with the FDA meeting and perhaps dialog between you and the agency. Is it possible that you might accelerate your internal development programs based on your platform technology, or are you already going at fast as you can there, where it makes sense?

Dean Mitchell

Again great question Gregg, and it relates back to the percent of R&D spent. We feel that we are moving about as fast as we can, in certainly the oxycodone program. The hydrocodone program and we said publicly and continue to believe that we will have that program heading into Phase III before the end of the year.

On the hydrocodone side, we could possibly do a little bit more, move a little bit faster, but it's much more constrained by what needs to be done technically to develop the product as opposed to how much resource we put into it?

So, we have been for several years very enthusiastic about this whole abuse-deterrent approach and continue to be very excited about the opportunity and, will as I said, as rapidly as we can.

Gregg Gilbert - Merrill Lynch

Thanks for the follow-up.

Dean Mitchell

Thanks Greg.

Operator

Thank you. Our next question will come from Ian Sanderson, Cowen and Company.

Ian Sanderson - Cowen and Company

Well, thanks for the follow-up. First, on animal health, what trends are you seeing on the demand side in the US and Europe, given the higher cost of production here? And secondly, have you disclosed exactly what the milestones were for ketoprofen gel that led to the payments in March?

Dean Mitchell

On the first one, Ian, really no significant change in trends between US and Europe. I think the big increase in cost of some of the inputs, particularly on the poultry side, is pretty significant, but they are the same increases across the world. Things like corn increases really being right across the globe. We've seen obviously some of the big producers having to deal with those increases and struggling a little bit to deal with them. But the real interesting part of that equation is that makes the use of our medicated fee that is even more efficient in terms of their production process. So I think, I really haven't seen any impact on our business, but we are watching it very closely. We clearly have customer under a lot of pressure and we are trying to work with them to help them through this difficult period.

Then the second part of the question, which was the ketoprofen in Transfersome gel. The first two milestones that we paid were both clinically related. We haven't said an awful lot about them, but one was related to the achievement of some safety data and the other was related to agreement of the Phase III clinical development program, in broad terms.

Ian Sanderson - Cowen and Company

Okay. Thank you.

Dean Mitchell

Thanks Ian.

Operator

(Operator Instructions) Well, gentlemen, at this time there are no further questions in the queue.

Jack Howarth

Thank you, Chantal. A replay of this morning's call will be available after 12 noon today. The rebroadcast may be accessed on the Internet at www.streetevents.com or by telephone using the following information: In the US dial 877-919-4059, and dialing from an international location, 334-323-7226. The participant code is 94596047. As always, if you have any follow-up questions, please give us a call. Thanks again for participating.

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!