King Pharma Settles With U.S.

The drug company will pay $124 million plus interest.
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Shares of

King Pharmaceuticals

(KG)

rose a day after the Bristol, Tenn., drug company settled allegations of overcharging government agencies for its products and underpaying rebates owed under Medicaid.

The company and the Justice Department announced on Tuesday, after the markets had closed, that King would pay $124 million plus interest to settle allegations it acted improperly between 1994 and 2002.

The announcement wasn't a surprise. For several quarters King has been telling shareholders that it was negotiating with the government and that it had set aside a reserve of $130.4 million.

"King believes that the existing accrual is sufficient to cover the full cost of all sums owed the federal and state governments pursuant to the agreements, together with related obligations to reimburse the expenses of some of the parties," the company said Tuesday.

King's stock gained 60 cents, or 3.9%, to $16.06 Wednesday.

"With respect to the settlement, we view this as neutral, since we never saw this as a huge overhang on the stock anyway," says Marc Goodman of Morgan Stanley in a Nov. 1 research note. "The timing and amount were both in line with expectations."

Goodman has an equal-weight rating on the stock. He doesn't own shares, but his firm says it expects to seek or receive compensation for investment-banking services in the next three months.

"We are extremely pleased to report the execution of virtually all agreements necessary to finally resolve the Medicaid issues," Brian Markison, King's CEO said. "While none of these issues resulted from intentional misconduct, we nevertheless have taken them very seriously and believe we have taken the necessary steps to avoid any recurrences."

The civil settlement resolves claims relating to Medicaid pricing, as well as claims that King overcharged units of the Public Health Service, failed to provide accurate information to the Veterans Administration and overcharged the VA.

"Drug companies have a duty and responsibility to ensure that the prices they report on their drug products are truthful and accurate," Assistant Attorney General Peter Keisler said.

King also signed a five-year "corporate integrity" agreement, promising to accurately report drug prices for federal programs, provide periodic reports to the U.S. government and submit to audits of its Medicaid rebate calculations. Most importantly, this "will not affect King's ongoing business with any customers, including the federal and state governments," the company said.

"King revealed the existence of its internal problems in a series of disclosures to the federal government and cooperated fully in uncovering the full extent of its problems," the Justice Department said.

King has reached similar deals with 48 states and the District of Columbia. It signed an agreement with the National Association of Medicaid Fraud Control Units on settlement terms to "resolve the claims of the one remaining state that participates in relevant health care programs." These agreements still must be approved by a federal district court in Pennsylvania.

The federal investigation of King was prompted by a lawsuit filed by a former employee under the whistleblower provisions for the federal False Claims Act. He brought similar charges in 13 states the District of Columbia.

The federal investigation involves two price formulas -- average manufacturer price and best price -- used to calculate rebates that drugmakers make to each state Medicaid program. These formulas also establish drug prices for certain state and federal programs.

King provided inaccurate figures for both formulas "across its entire product line," the Justice Department said. The mistakes "resulted from the absence of appropriate internal systems and controls and improper methodologies used to calculate the erroneous figures."

The agreement with the Justice Department and the various states doesn't affect King's ongoing discussions with the

Securities and Exchange Commission

, which has been examining the company's pricing practices and its accounting for returned products.

King said the product-return investigation is continuing, but the SEC staff has told the company it won't recommend an enforcement action on the pricing issues.

Although the SEC could still consider civil charges vs. current or former employees over the pricing errors, "King does not believe that any governmental unit with authority to assert criminal charges is considering any charges of that kind," the company said. "Based on all information currently available to it, King does not anticipate that the results of the SEC's ongoing investigation will have a material adverse effect."