King Pharmaceuticals Inc. (KG) reported second-quarter earnings of 17 cents per share, a penny above the Zacks Consensus Estimate, but 46.9% below the year-ago earnings. Revenues fell 16.6% to $370.9 million mainly due to the lackluster performance of several key products and the entry of two generic versions of Skelaxin. Revenues, however, exceeded the Zacks Consensus Estimate by $8.9 million.
Quarter in Detail
King Pharma’s branded Pharmaceuticals segment declined 41.1% with revenues coming in at $162 million. Including royalties from the sales on authorized generic version of Skelaxin, branded Pharmaceutical revenues were $188 million.
Revenues of all key products declined from the year-ago period. Thrombin-JMI sales declined 24.5% to $37 million. We expect Thrombin-JMI sales to continue declining due to tough competition in the form of ZymoGenetics’ (ZGEN) Recothrom and Johnson & Johnson’s (JNJ) Evithrom.
Meanwhile, Skelaxin, which posted sales of $91 million in the first quarter of 2010, saw a huge drop in sales due to the entry of two generic versions early in the second quarter. Skelaxin sales plunged to $5 million in the second quarter of 2010, down from $102 million in the year-ago quarter.
Avinza revenues declined 13.8% to $25 million. Meanwhile, Flector Patch, obtained through King Pharma’s acquisition of Alpharma, recorded $35 million in sales, down 10.3%. Embeda, another product obtained through the Alpharma acquisition, posted sales of $15 million, up 66.7% sequentially. Embeda was launched in the third quarter of 2009.
Revenues from the Animal Health business were $85 million in the reported quarter, up 2.4%. The Animal Health business should provide positive cash flow and diversification.
We were pleased to see a rebound in revenues from King Pharma’s Meridian Auto-Injector business which was affected by lower government orders in the first quarter of 2010. Second quarter revenues came in at $83 million, up 16.3%. Price increases, higher sales and royalties on EpiPen helped offset the impact of lower government orders.
Operating expenses remained relatively unchanged at $298 million. While selling, general and administrative expenses increased 7.7% to $130 million, research & development expenses 56.5% to $33.2 million.
King Pharma said that it remains on track to re-submit its marketing applications for opioid candidates, Remoxy and Acurox. While the Remoxy application should be re-submitted to the US Food and Drug Administration (FDA) by year-end, the marketing application for Acurox is scheduled to be re-submitted in the US in the first quarter of 2011.
King Pharma is also looking to start enrolling patients for three studies that will evaluate the safety and efficacy of oxycodone NT. Oxycodone NT is a novel formulation of long-acting oxycodone that is being developed for the treatment of moderate to severe chronic pain. The candidate could have the potential to resist common methods of abuse and misuse.
Guidance Maintained
King Pharma maintained its previously announced outlook for 2010. The company expects gross margins in the range of 67-68%. While SG&A is expected in the range of $515 million – $525 million, R&D spend is expected in the range of $110 – $120 million. The guidance includes the impact ($15 million) of the US healthcare reform.
Neutral on King Pharma
We currently have a Neutral recommendation on King Pharma, which is supported by a Zacks #3 Rank (Hold). King Pharma has been facing several challenges in the form of declining prescription trends and generic competition for key products, increasing competition, generic threats, and pipeline setbacks. While we expect a decline in both earnings and revenues in 2010, we expect the company to deliver both top-and bottom-line growth from 2011. We expect investor focus to remain on the successful commercialization of Embeda and pipeline updates.
