UPDATE - King Pharmaceutical

King Pharmaceutical (KG)

Last week, the stock of King Pharmaceutical declined sharply as a result of the announced SEC investigation into the company’s pricing policy on two of its drugs which were sold to Medicare. Additionally, the pending acquisition of two drug licenses from Elan Corp for $850 million could possibly be derailed as a result of a FTC investigation of Elan’s marketing practices.

With respect to the SEC investigation of King’s pricing policy, the company stated that the total amount of sales of the two drugs during 1999 and 2000 was about $56 million - this is out of sales of over $2 billion during the period. We are not concerned about this situation mainly because it represents a miniscule amount.

With regard to the pending license acquisition from Elan Corp., King announced that its earnings would increase by about 5 cents per share to the $1.60-$1.65 per share level. Should this deal not be consummated, it would appear that the company’s earnings would be in the $1.55-$1.60 per share level. These are still very good earnings and maintains the company’s strong growth rate.

King Pharmaceutical continues to benefit from the growing sales of its core drugs and it has a very strong balance sheet and operating cash flow. While we recognize the stock will trade erratically over the near term, we believe the current price level of $11.50 per share does not reflect the strong fundamental of the company and consider the stock an extremely undervalued situation. Our price target of $21.00 per share continues to be very achievable.

 

Stock Traders Press Management