King Falls Amid Audit News - TheStreet

King Falls Amid Audit News

The pharmaceutical company's shares shed 7.4% after it releases an internal audit.
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Shares of

King Pharmaceuticals


sank Tuesday as the company released the results of an internal audit sparked by an investigation that the

Securities and Exchange Commission

launched in March.

The stock ended down $1.19, or 7.4%, at $14.80, after falling as low as $14.52.

The audit found several errors that caused King to restate its financial statements for the year ended Dec. 31, 2002, and the first quarter, which ended March 31. King said it has filed with the SEC its 10-K report containing audited consolidated financial statements for last year as well as its 10-Q report for the first quarter ended March 31. Both documents had been delayed after the Bristol, Tenn.-based drug company was notified about the SEC investigation.

King said its audit committee concluded that problems it investigated related to certain pricing practices "did not arise from an effort on the part of the of the company's current or prior management to mislead investors by manipulating reported financial results."

King acknowledged that it had underpaid $46.5 million in Medicaid and other government pricing programs between 1998 and 2002.

The audit committee, which hired independent counsel and whose review took four months, concluded that the pricing errors "did not result in any material financial misstatements." But it emphasized that King needed to devote more time and resources to improving compliance with all reporting requirements for Medicaid rebates and other government pricing programs.

The company said Tuesday that it has contacted the Justice Department, the Inspector General of the Department of Health and Human Services and the Centers for Medicare and Medicaid Services about the errors and expects to make the necessary payments this year.

The SEC issued a subpoena to the company on March 10 asking for documents related to its pricing practices involving all drug products provided to any Medicaid agency in 1999, information about the sales of two products to two companies in 1999 and 2000; and information about Medicaid rebates on another product since 2000.

On May 14, the SEC issued another subpoena seeking, among other things, information on two more drugs and on the audit committee's internal review.

Jefferson J. Gregory, the company's chairman and chief executive, told analysts and investors Tuesday in a telephone conference call that the SEC investigation is continuing. He offered no details.

Adjusting for the Medicaid rebate and two other financial matters, King restated its 2002 earnings to an audited net income of $182.5 million, or 74 cents a share, from an unaudited $238 million, or 97 cents a share. Revenue was reduced to $1.13 billion from $1.18 billion.

For the first quarter, the revised data show a loss of $7.19 million, or 3 cents a share, vs. a loss of $8.02 million, or 3 cents a share. The revised revenue was $343.84 million vs. $343.52 million.

King also released second-quarter results Tuesday, posting a loss of $35 million, or 15 cents a share, compared with a profit of $58.4 million, or 24 cents a share, for the three months ended June 30, 2002. Sales rose 31% to $370.7 million vs. $282.5 million.

The consensus EPS estimate by 17 analysts polled by Thomson First Call was 36 cents.

King pointed out that if special items are excluded, it would have had a second-quarter EPS of 35 cents. The special items included charges related to its acquiring the rights to a drug; professional fees for responding to the SEC inquiry and convening the audit committee's review; and a recall of certain lots of one drug.

King also noted in its 10-K statement that 29 lawsuits have been filed since March, alleging breach of fiduciary duty or claiming that officers and directors made "false or misleading statements" about operations and finances between March 31, 1999 and March 11, 2003. "We intend to defend these lawsuits vigorously," the company said.