Updated from 8:28 a.m. EST
What happens when a company announces sales that missed analysts' revenue predictions, an adjustment in quarterly and full-year results due to government investigations and the intention of the CEO to retire?
If it's King Pharmaceuticals (KG), the stock goes up. On Thursday, shares of the Bristol, Tenn.-based drug company gained $2.39, or 14.2%, to hit $19.25.
The company said Jefferson J. Gregory would step down as chief executive as soon as a successor could be chosen. The company's board on Wednesday selected a chairman of a search committee. The committee's members will be chosen soon; Gregory said he will not participate in the choice of the new CEO.Gregory also said he would remain as chairman. He did not say, however, whether he would stand for re-election as a board member when his term expires at the end of the year. Gregory, 48, told analysts in a conference call Thursday, that he is leaving to spend more time with his family and to explore other business ventures. The decision to leave "was more of a recent decision based on my family dynamics," he said. "King has been my entire life for the last 10 years." Gregory, who once worked as a registered pharmacist, has been CEO since January 2002 and chairman since June 2002. He has been a director since 1995. He was president of King since its inception in 1993. When Gregory leaves the CEO's job and if he decides to leave the board at year-end, he could be the last executive among family members who created and have run King. One brother, John M. Gregory, the company's founder, relinquished the CEO's and chairman's title to Jefferson Gregory in 2002. Another brother, Joseph R. Gregory, retired as vice chairman of King in February 2003. And another brother, James E. Gregory, served as executive vice president between 1995 and 2000, as well as a director for part of 2002. Herschel Blessing, husband of the Gregory brothers' sister, Mary Ann, retired as executive vice president in July 2002. The hiring of a new chief executive "indicates to us that King is committed to change, which, in our view, is a long-term positive," said Marc Goodman, of Morgan Stanley, in a Thursday research report. Goodman said other positive signs include the company's hiring in the fourth quarter of a chief operating officer and a new director of business development. He has an overweight recommendation on the stock. (He doesn't own shares, but his firm says it expects to receive or seek compensation for investment banking services from King in the next three months.) "King still has a number of outstanding issues and how quickly a new CEO can turn around the business is still an open question in our mind," said Corey Davis, of JP Morgan, in a report to clients on Thursday. He rates the stock as neutral. (He doesn't own shares and his firm doesn't have an investment banking relationship with King.) One outstanding issue is the continuing investigations by the Securities and Exchange Commission and the U.S. Department of Health and Human Services over the company's billing practices relating to Medicaid, the federal-state health care program for the poor. The SEC launched a formal investigation last March, and the company convened an independent group of experts to examine its billing practices. In late July, the internal audit found enough errors to require the company to re-state its financial results for fiscal year 2002 and the first quarter of 2003. The independent committee said that King ? which underpaid $46.5 million in Medicaid between 1998 and 2002 ? did not try to mislead investors or manipulate financial results. On Thursday, the company said its audit found another $18 million in underpayments for this period as well as $900,000 in underpayments for Medicaid between 1994 and 1997. As a result, the company cut fourth-quarter sales and increased accrued expenses each by $18.9 million. The company said this adjustment was "substantially offset" by a $15.2 reduction in co-promotion fees paid to a marketing partner. But the company warned that its results could change depending on the completion of the federal investigations. The company said its estimates on the impact of the underpayments exclude any interest, fines, penalties or "other amounts" that might be owed. The company added that it cannot predict when the investigation will be concluded. Several analysts said they are concerned about what they say are uncomfortably high inventory levels of some King drugs, most notably Altace, which is used to reduce the risk of stroke and heart attacks, and Levoxyl, a treatment for thyroid disorders. James R. Lattanzi, King's chief financial officer, told analysts Thursday that the company was "not totally satisfied" with the inventory levels of Altace even though he expected more inventory reductions in the first quarter of 2004, following reductions in the fourth quarter of 2003. The company said first-quarter sales of Altace could be "adversely affected" as the inventory levels are pared. The company added that it is "actively engaged" in negotiations with wholesalers to establish inventory management agreements to better control inventory levels. Fourth quarter Altace sales were flat at $108.1 million versus $109.5 million for the same period in 2002. For the full year, Altace produced a 17% sales gain to $527.1 million. Altace accounts for nearly one-third of King's revenue. For the three months ended Dec. 31, 2003, the company earned $42 million, or 17 cents a share, including one-time charges and special items. That compares to a loss of $31.4 million, or 13 cents a share, for the same period in 2002. Revenue jumped 41% to $382.6 million, but it fell about $24 million short the Wall Street consensus as tabulated by Reuters Research. Excluding special items, King earned $76.7 million, or 32 cents a share, matching the consensus prediction of analysts polled by Thomson First Call. That compares to a profit of $67.2 million, or 28 cents, for the fourth quarter of 2002. The company also reiterated its financial projections for this year: EPS, excluding special items, in the range of $1.50 to $1.60; and revenue in the range of $1.75 billion to $1.85 billion. Analysts queried by Thomson First Call offer a consensus EPS of $1.53 with a range of $1.45 to $1.60. The consensus revenue prediction is $1.77 billion.