King Pharmaceuticals, Inc. Q2 2008 Earnings Call Transcript

| About: King Pharmaceuticals (KG)

King Pharmaceuticals, Inc. (KG) Q2 FY08 Earnings Call August 7, 2008 11:00 AM ET

Executives

James E. Green - EVP, Corporate Affairs

Brian A. Markison - Chairman, President and CEO

Joseph Squicciarino - CFO

Stephen J. Andrzejewski - Chief Commercial Officer

Eric G. Carter - Chief Science Officer

Analysts

Gregory Gilbert - Merrill Lynch

Corey Davis - Natixis Bleichroeder

Ian Sanderson - Cowen and Company

Kim Seth - Goldman Sachs

Michael Tong - Wachovia Capital Markets, LLC

Marc Goodman - Credit Suisse

Operator

Good morning. Thank you for joining the King Pharmaceuticals Conference Call. Please welcome James Green, Executive Vice President of Corporate Affairs, King Pharmaceuticals. Sir the floor is yours

James E. Green - Executive Vice President, Corporate Affairs

Good morning ladies and gentlemen. Thank you for joining us today to discuss our financial results for the second quarter ended June 30, 2008. Joining me today are; Brian Markison, Chairman, President, and Chief Executive Officer of King; Joe Squicciarino, our Chief Financial Officer; and other members of our management team.

Additionally, 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 expressed written consent. Also, reports and discussions during this conference call may contain forward-looking statements that reflect management's current view of future events and operations, including, but not limited to, statements pertaining to expectations regarding our product development pipeline, our plan to maximize the potential of our existing products, our future financial results, and our strategy for long-term growth.

Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially. Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in the company's press release issued this morning, August 7, 2008, and in the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2007, and Form 10-Q for the quarter ended March 31, 2008 which are on file with the SEC. King does not undertake to publicly update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

Under Generally Accepted Accounting Principles known as GAAP, net earnings and diluted earnings per share include special items. In addition to our financial results determined in accordance with GAAP, King provides its net earnings and diluted earnings per share results excluding special items. These non-GAAP financial measures exclude special items, which our management considers to be those items that do not relate to the company's ongoing underlying business, are non-recurring or are not generally predictable. Examples of these are listed in the About Special Items section of our press release issued this morning.

We believe the identification of special items enhances the analysis of our company's ongoing underlying business and of our company's financial results when comparing results to those of a previous or subsequent like period. However, it should be noted that the determination of whether to classify an item as a special item involves judgments by our management. The specifics of special items affecting the first quarter and a reconciliation of non-GAAP financial measures to GAAP can be found in this morning's press release.

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, ladies and gentlemen, thank you for joining us today. I' pleased to report that we continue to make great strides in the development of our pipeline during the second quarter and remain on track to attain our goal of filings three new drug applications by the end of this year.

Our partner Pain Therapeutics submitted the first of these the NDA for REMOXY in early June and we expect to hear from the FDA in the not too distant future. Accordingly, our second quarter results include approximately $16 million in related milestones. Of course we will update you once we have more information.

The NDA submission for REMOXY is an important advance in meeting the pain management needs that patients and prescribers concerned with addressing the risks of prescription pain medicines misuse and abuse within our communities.

Also in June we along with Acura Pharmaceuticals reported positive top line results from the pivotal Phase III clinical trial evaluating Acura's tablets which triggered $5 million milestone payment. We expect to submit the drug applications before the end of this year.

ACUROX is an early administrated short-acting oxycodone formulation that is intended to relieve moderate severe pain while resisting or deterring common message of prescription drug misuse and abuse.

Also during the second quarter we exercise an option under our agreement with Acura to acquire the rights to another short-acting opioid formulation. As a result we are now currently developing three short-acting opioid formulations utilizing ACUROX version technology.

As a reminder our market research shows that 5% share of immediate and extended release opioid markets could have translate into annual revenues of approximately $00 million of branded pricing. Additionally, the NDA for CORVUE our pharmacologic stress-imaging agent is proceeding well and remains on schedule for submission to the FDA in December of this year.

Now I would like to turn the call over to Joe Squicciarino our Chief Financial Officer for the purpose of reviewing our financial results for the second quarter.

Joseph Squicciarino - Chief Financial Officer

Thank you, Brian, and good morning everyone.

Revenues for the second quarter totaled $397 million. Net revenue from our branded pharmaceutical segment totaled $316 million during the quarter compared to $467 million in the same quarter of last year. This decrease was primarily due to the market entry of the first generic substitute for Altace in December 2007.

We expect Altace net sales continue to decrease during the remainder of this year as more generics enters the market in June.

However, I would like to emphasize the continued strong performance of Thrombin-JMI in a highly competitive market and point out that Avinza is gaining traction as we have seen three successive quarters of total prescription growth.

Total revenues during the second quarter also included $55 million from our Meridian Auto-Injector business and ADENOSCAN royalties of $24 million.

Our gross margin excluding special items was approximately 75% in the second quarter, and we continue to expect the full year gross margin rate of 75%.

Total selling, general and administrative expense excluding special item and our co-promotion fee for Altace was $103 million in the second quarter of 2008, compared to a $127 million last year. As expected we have realized significant SG&A savings this year.

Depreciation and amortization excluding special items totaled $31 million in the second quarter of 2008.

Research and development expense excluding acquired in-process R&D equals $49 million during the second quarter. This amount includes development milestones of approximately $21 million.

Our effective tax rate for the second quarter was approximately 34%.

Moving to earnings per share for the second quarter GAAP EPS TPS was $0.18, while EPS excluding special items was $0.30.

Next I would like to review just a couple of things with respect to the balance sheet beginning with the brief update on our investments in debt securities. As of June 30, 2008 the share value of these securities was $432 million. Of this total $98 million is classified as current assets and $334 million is classified as long-term assets.

The current assets primarily consists of our investment in debt securities associated with municipal bonds. We have classified these investment as current because we believe that it is reasonable to expect that they may convert the cash within one year based on the activity we've experienced year-to-date with respect to investment in this type of security.

Our investments in debt securities that we have classified as long-term consists of securities associated with student loans.

In closing it is important to note that our unrestricted cash and cash equivalents totaled approximately $1.1 billion as of June 30th. As cash from continuing operations for the second quarter totaled $138 million. As a result of our continued strong cash flow we are on track to meet this year's cash flow form operations forecast of $400 million to $450 million.

Now I would like to turn the call back over to the operator for question-and-answer session. Operator?

Question And Answer

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from Greg Gilbert of Merrill Lynch. Please state your question.

Gregory Gilbert - Merrill Lynch

Thanks. Good morning. Can you give us your latest thoughts on the competitive environment in the Thrombin market and whether you are assuming growth in that product going forward?

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

Yes. Thanks, Greg, good morning, it's Brian. Number one, I think we are doing a pretty good job competing in the Thrombin market with a lot of new noise and new competition. I think growth in the market should be expected by virtue of the fact that there is more than just King out there promoting the product. And I think growth is Thrombin-JMI is going to be very difficult as we go forward. But, I think the team on a King side is doing a tremendous job holding the forth with what we have.

Gregory Gilbert - Merrill Lynch

On Avinza, can you update us on the patent challenge front there and any life cycle management initiative ongoing there?

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

Certainly the patent challenge is proceeding, we are still in the early days of discovery really nothing new to tell you there. The other parts of life cycle management for Avinza we have number of clinical trials that are ongoing that we hope to see some early results than actually distant future. Some encouraging data, but in terms of the formulations front there is nothing exciting going on there.

Gregory Gilbert - Merrill Lynch

And lastly before I get back in line Brian are we beyond the 60 days point from the REMOXY filing and is that a significant data point in this environment?

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

Greg, thanks. I believe the magic day could be tomorrow. But if your are looking at 60 days and we are hopeful that we are going to get some reasonably good news.

Gregory Gilbert - Merrill Lynch

Thanks.

Operator

Thank you. Our next question is from Corey Davis of Natixis. Please state your question.

Corey Davis - Natixis Bleichroeder

Just thanks for clarifying that because I think in the direct press release they said the FDA has 90 days to accept the remarks to be filing but, it's my understanding that it's always been 60. So thanks for that clarification? And secondly are you conducting any the likeability types studies on REMOXY or ACUROX kind of things that the panel had asked for.

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

Corey, we are doing quite a bit of work with both REMOXY and ACUROX at the moment. However, with REMOXY right now our major focus is making sure that the team is prepared to handle the upcoming questions and information requests from the agency. We are also formulating our plans for our phase for studies post approval studies for REMOXY, and again I want to remind everyone that neither King or Pain Therapeutics has really disclosed the full extent of the information that we do have available that's going into or has gone into the NDA. So that's one part that we are keeping separate. The other part on ACUROX there is a quite a bit of work ongoing on right now, and we hope to have that information available in the not too distant future.

Corey Davis - Natixis Bleichroeder

Okay, great. And I guess maybe last I'll ask the standard quarterly somewhat boring question, but an important one. Well that cash you have got how are you finding the landscape for acquisitions and/or in licensing opportunities?

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

Yeah, Corey I think the landscape is no more challenging than it was a little while ago, the cash flow that we have on hand certainly is a great enabling factor, and it helps us to be a little more creative and how we are looking at things. So again highly competitive feels, a lots of good opportunities out there. We feel we are in the middle of a few and hopefully at the right time if any of them coming in our direction.

Corey Davis - Natixis Bleichroeder

Then lastly can you confirm the Bloomberg article from two days ago that Pfizer is going to buy you. I am just kidding on not one thanks for answering the other ones.

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

You are more than welcome. Thank you.

Operator

Next question is from Ian Sanderson of Cowen. Please state your question.

Ian Sanderson - Cowen and Company

Good morning. Thanks for taking the questions. First on Skelaxin, can you talk a little bit about the competitive impact you're seeing from Savalon [ph] and Merck and what the counter detail message might be their. On Altace maybe if you can just update us on what the trade inventory levels might have been at the end of Q2 and maybe what the expectations are trend wise for the second half of the year there?

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

Okay. Ian let's do the Altace question first with Joe and then Steve Andrzejewski and I will fill the Skelaxin question.

Joseph Squicciarino - Chief Financial Officer

Hi, Ian thanks for the question. as far as Altace's inventory levels go into trade we're at six-tenths of a month, which is down from the end of the first quarter where we were at nine-tenths of the month, and we are measuring that on a current two week basis, so there really isn't much inventory out there at all, and I miss the second part of your Altace question.

Ian Sanderson - Cowen and Company

Just what we should look forward in term... what are you seeing in terms of competitive trends from the generics and how we should model this for the back half of the year?

Joseph Squicciarino - Chief Financial Officer

Right. I think the way that you should think about that is sales, net sales for Altace in the second quarter were $44 million. As we speak the generic have captured 90% share of the ramipril market. So we really in our forecast here have Altace at extremely low levels for the balance of this year, very low levels, can measure with 90% current share for the generic and that's going to go no where but north... between now and the end of the year.

Ian Sanderson - Cowen and Company

Great. Thanks.

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

Okay. Ian and with Skelaxin I think, what we have seen with competition obviously is the increased share of voice through Savalon [ph] where they have just got a number of people out there promoting their products. However, what I would like to point out is through June they have managed to capture only seven-tenths of the share points roughly. So and now as far as their currently detailing is concerned I'll let Steve take the rest of that.

Stephen J. Andrzejewski - Chief Commercial Officer

Yes, they are obviously trying to focus on a once a day message but its is for flexural where the base compound of flexural you have a sedition issue that comes into play. But, I think many of the script that they are trying to generate as Brian said is opening up more of an opportunity for generics and certainly we've had a little bit of impact but, we've continued to faster a lot of focus with people that have abuse the product for long period of time.

Ian Sanderson - Cowen and Company

If I could run one last question on the special items the excess purchase commitment of 2.7 million could you tell us what that is and also what prompted the write-down of the synergies [ph] assets?

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

Yes thanks Ian the excess purchase commitment pertains to a contractual agreement that we have with Sanofi-Aventis regarding the purchase of both ramipril or the API. And the impairment pertains at Synercid, which is a product in our portfolio that used to treat acute hospital infections the sales of that product are very low in the grand scheme of things in our portfolio, and they reached the point where we had to take a hard look at cash flow and the resulting cash flow as we look forward were such that we had to impair the asset and hence the $38 million, $39 million charge pertaining to that.

Ian Sanderson - Cowen and Company

Great. Thank you very much.

Operator

Our next question is from Kim Seth of Goldman Sachs. Please state your question.

Kim Seth - Goldman Sachs

Good morning, and thanks for taking the question. Just a quick question on REMOXY in terms of the data that's potentially up coming at the IASP meeting in Glasgow, Scotland. I was wondering if you could tell us what you expect to be talking about there in terms of data if you are presenting some?

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

Yes, Kim the data will describe two clinical studies the pivotal trial and the study that was design to look at the interaction with our goal.

Kim Seth - Goldman Sachs

Okay. And follow-up on Avinza just we have seen some traction gained on prescription growth. I was wondering if you can describe a little bit about what's underlying that on the ground. And then also if you could talk about your expectations in the back half of the year and in 2009? Thanks.

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

Okay, you're welcome. Kim I think with regard to Avinza and the traction we have seen I think it could be best attributed to you know our sales force after our restructuring getting their ducks in a row, getting the calls of frequency that were we needed in our call plan and also we manage to improve our managed care position substantially. So If turn back the hands a time when Logen had the product that they dismantled lot of their managed care contracts just before the sale process when we picked up the brand we has to reopen those doors. We have managed to do so somewhat successfully, which is a good sign for our organization. And the Avinza quarter-to-quarter growth is also an exciting thing to see as we get prepared to hopefully launch REMOXY and the other follow-on compounds.

Kim Seth - Goldman Sachs

Thanks.

Operator

Our next question is from Michael Tong of Wachovia Capital. Please state your question.

Michael Tong - Wachovia Capital Markets, LLC

Hi good morning, I am wondering if you will share with us an honest sales for the quarter?

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

Michael we are going to look that up so just bear with us once second, okay.

Michael Tong - Wachovia Capital Markets, LLC

Okay. While you're doing that, I'm wondering if you can provide an update on T62?

Joseph Squicciarino - Chief Financial Officer

Hi Michael, it's Joe here. Sonata sales in the second quarter were $9 million.

Michael Tong - Wachovia Capital Markets, LLC

Okay. And in T62?

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

Yeah, and this is Dr. Carter. Go ahead.

Eric G. Carter - Chief Science Officer

Sorry, Brian. T62 we are poised to initiate the dosing of our proof-of-concept study.

Michael Tong - Wachovia Capital Markets, LLC

Proof-of-concept study?

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

Phase II.

Eric G. Carter - Chief Science Officer

Phase II.

Michael Tong - Wachovia Capital Markets, LLC

Okay. And then lastly, if I look at your R&D, excluding the milestone that you read about $27 million, $28 million for the quarter, is that a level that we can kind of think about as the foundation for the rest of the year?

Joseph Squicciarino - Chief Financial Officer

Michael. That's a good question. And we're currently in the process of reviewing our spend out only for the balance of this year, but as we look forward to 2009. The... you would purposely point out that when you back out milestones, you're down to the level that you mentioned, and that's a reflection of... in the past quarters, we've really... we had a ramp of at a sustained level for REMOXY and as other compounds, not only from PTI come into play, but also for Acura. We're... we need to plan for that as well. So at the beginning of this year, we said that our R&D spend would be somewhere in the range of $175 million to $180 million. As we look to the balance of this year, we'll be at a level somewhat lower than that, but we'll have much better clarity around that by the time we get to the end of the third quarter.

Michael Tong - Wachovia Capital Markets, LLC

Okay. And just to clarify, does that lower than that comment include or exclude the $21 million in milestone in a quarter?

Joseph Squicciarino - Chief Financial Officer

Yes, it includes Michael.

Michael Tong - Wachovia Capital Markets, LLC

Okay, great. Thank you.

Operator

Our next question is from Marc Goodman of Credit Suisse. Please state your question.

Marc Goodman - Credit Suisse

Yeah, first question you started taking about Thrombin a little bit. Can you just discuss the pricing environment what's just... what's happening out there. I mean obviously we can see what you've reported in sales and stuff but just give us a sense on the competitive dynamic the price behind the scene and that's question one? Question two is the Meridian revenues were very big was there a big government contract in the quarter or was it just that the panel is just huge? And then the third question is can you talk about the impact that the regadenoson launch has had so far I believe it just launched like a month ago or something like that and what's happened so far and what's your expectations are for those royalties? Thanks.

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

Okay, Marc so if have it correct regadenoson question, meridian question and more color on Thrombin-JMI. Okay so starting first with Thrombin-JMI I think my earlier predictions are coming true, well this is going to be an account-by-account fight. And I think we are seeing fair amount of pressure on pricing certainly, but again I want to remind everybody that we are vertically integrated with Thrombin-JMI so we think we have a fairly strong competitive position if it comes to difficulty in pricing. So that's one piece, but there is a lot pressure on the margin here. Now with regadenoson we seen the launch but with Lexiscan there has been no appreciable impact in fact our second quarter royalties were actually a little higher than usual. However, and we are investigating into that but we would expect that increase will probably wash through in the third quarter, and I think it still early going here with regard to the launch of Lexiscan or regadenoson. Now with you meridian question I am going to turn that over to Joe.

Joseph Squicciarino - Chief Financial Officer

Hey Marc as you probably recall we don't give the details of sales within our meridian franchise, but I will say this that the second quarter sale did benefit from an order from the CDC and having EpiPen continues to do well in the marketplace.

Marc Goodman - Credit Suisse

Can you just give us a sense of the growth rate of EpiPen?

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

About 5% or 6%.

Joseph Squicciarino - Chief Financial Officer

It hovers in that range 5% to 6%

Marc Goodman - Credit Suisse

Thanks.

Operator

Thank you. Our next question is from Greg Gilbert of Merrill Lynch. Please state your question.

Gregory Gilbert - Merrill Lynch

Thanks. Couple of follow-ups, Joe for Levoxyl, is that $20 million number for the quarter does normalizes, we are going to get after a couple quarters that bounced around in the first half level [ph]?

Joseph Squicciarino - Chief Financial Officer

I'd like to be able to say it's normalized, but once again inventory levels are very stable for Levoxyl at least for the past two quarters. Our planning is somewhere in that range that's the best I can do for you on that but we are looking at about that range for the balance of this year.

Gregory Gilbert - Merrill Lynch

The first half level roughly the first half level, Joe?

Joseph Squicciarino - Chief Financial Officer

I am sorry?

Gregory Gilbert - Merrill Lynch

Looking at the first half sales in aggregate you feel pretty good about that relative to the prescription that sort of a predictor of--

Joseph Squicciarino - Chief Financial Officer

As you know the product has been trailing down overtime, but in the back half of the year the 1920 is the range that we are looking at.

Gregory Gilbert - Merrill Lynch

Okay. Brian have you entertained any discussions with Sandoz on Skelaxin and is there any other update to provide on that saga?

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

Yes, we certainly have entertainment discussions we will not confirm or deny that we've had, but there is no update at all to tell you on that front.

Gregory Gilbert - Merrill Lynch

Okay. Are you assuming that there will be a panel meeting on REMOXY and possibly better later [ph] this year?

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

Well you know I would think it's likely, again I'm purely speculating at this point, but given the recent history and what we've seen with other products of this nature, I would think it's a reasonable assumption to make, and we're certainly planning on it.

Gregory Gilbert - Merrill Lynch

And lastly Brian, can you share with us what your most pressing business development priorities are right now you are characterizing environment earlier, but what are King's most pressing priorities from your point of view?

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

Well it's a phase of fine line, I think we're focused in building out on Neuroscience portfolio, and I think I'm going to leave it at that, but thank you for the question.

Gregory Gilbert - Merrill Lynch

Okay.

Operator

We have no further questions. I would now like to turn the call over to Mr. James Green.

James E. Green - Executive Vice President, Corporate Affairs

I just want to thank everyone for joining our call today, and we appreciate your interest in King Pharmaceuticals. Have a good day.

Operator

Thank you ladies and gentlemen. This concludes today's conference call. Have a nice day.

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