King Pharma Tries to Shed Its Pauper Image

Starting with its results Wednesday, the firm needs to show Wall Street it can stand alone.
By Robert Steyer ,

Updated from March 14

King Pharmaceuticals

(KG)

is scheduled to serve up its 2004 financial report and 2005 predictions Wednesday, hoping to convince investors that it is more than a specialist in restating earnings, a magnet for government investigations and a punching bag for financier Carl C. Icahn.

King will have plenty of convincing to do. Its stock has been battered, having lost about 50% in the last 12 months. Its reputation has been battered, as its financial laundry was hung out to dry during

Mylan Laboratories'

(MYL) - Get Report

ill-fated bid to buy the Bristol, Tenn.-based company.

Mylan and King

abandoned the deal in late February, saying they couldn't agree on a revised acquisition price from the one announced in July.

Meanwhile, Icahn used King as target practice as he tried to persuade Mylan shareholders -- and threaten Mylan board members -- to oppose the bid. During the deal debate, he became Mylan's second-largest shareholder, while he was shorting King's stock.

Now, King must convince Wall Street that it can survive on its own. It must persuade investors that it has significant growth prospects for the collection of brand-name drugs that made it so attractive to generic drug-specialist Mylan. And it must outline a strategic plan to shed its reputation as a mismanaged confederation of products.

A Big Fixer-Upper

"It's time to build a company," said Marc Goodman of Morgan Stanley in a research report after the Mylan-King deal collapsed. "This will be a major challenge."

Goodman, who has an equal weight rating on the stock, said King must deliver new products and build a research pipeline. "But first, King must rebase earnings expectations," said Goodman, who predicts earnings per share of 68 cents in 2005 compared to the consensus view of $1.03, according to Thomson First Call. The average estimate for 2004 is 61 cents.

Because

King has restated so many financial reports -- 2002, 2003 and half of 2004 -- analysts are justifiably confused. The EPS predictions in 2004 range from 51 cents to 75 cents; the 2005 range is from 68 cents to $1.39.

Regardless, King has had a poor record of meeting Wall Street expectations. In the past six quarters tracked by Thomson First Call, King has missed the consensus four times and matched the consensus twice. So, it's no wonder that 10 of 13 analysts have a hold rating on the stock, according to Thomson First Call. There are two buy recommendations and one sell recommendation.

Goodman said King's near-term future is hurt by the slowing growth of the blood pressure drug Altace, which accounted for one-third of the company's $1.52 billion in sales in 2003.

King's second-biggest drug in 2003, Skelaxin, a muscle pain reliever, faces generic competition this year, Goodman said. And the third best-selling drug in 2003, Levoxyl, a thyroid treatment, is under the gun from generics. "So King management has got its hands full," Goodman said.

More Cautious Views

David W. Maris, a Banc of America analyst and longtime critic of the King-Mylan deal, said recently that 2004's revenue will be about 11% below that of 2003 and that 2005's revenue will be flat.

King had better make it as an independent company because "we see few potential buyers," he said in a recent report to clients as he maintained his neutral rating on the company. He doesn't own shares, and his firm doesn't have an investment banking relationship.

The concern about King extends to Standard & Poor's, which recently said the failed Mylan deal raised several "challenges and uncertainties." King remains on S&P's CreditWatch list, meaning its debt rating is subject to review. S&P recently changed its CreditWatch outlook to negative from "developing implications," suggesting King could be facing a downgrade.

King was placed on CreditWatch in mid-December "due to increased uncertainty" over the completion of the Mylan deal. The negative outlook was caused by the deal's demise. S&P isn't thrilled with King's prospects as a stand-alone company, citing the potential revenue setbacks for Altace, Skelaxin and Levoxyl.

Right now, King isn't saying much. The day after the Mylan deal died, King issued a press release saying the company is "repositioned for renewed growth." But it offered few details beyond CEO Brian A. Markison's statements that its new management has moved to "strategically reposition" King and has begun "streamlining" the business so that "King is now more focused than ever."

One big question: Given its financial troubles, can King keep the 3,000 employees, including 1,300 sales representatives that it had at the end of 2003? Markison has hinted at job cuts, noting that the sales and marketing staff has benefited from "recruiting key talent, investing in systems

and right-sizing."

Markison added that the new director of commercial operations has "optimized the size of its sales force," improved compensation and strengthened marketing and market research.

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