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Shares of

King Pharmaceuticals


rose Friday for a second straight day following the company's announcement Thursday that its chief executive would resign as soon as a successor is found.

The Bristol, Tenn., drugmaker's stock jumped 14% Thursday after the company said Jefferson Gregory, who had been CEO since January 2002 and who had been an executive since King's founding in 1993, would relinquish his job.

Gregory, 48, cited a desire to spend more time with his family and to explore other business opportunities as the reasons for his decision. Gregory will remain as King's chairman, but he did not say if he would stand for re-election to the board of directors when his term expires this year.

On Friday, King's stock was up 3.8%, or 73 cents, to $19.98 in late morning trading. The stock rose as high as $20.62.

King's stock got a boost from upgrades from two investment banking firms. Wachovia Securities raised its rating Friday morning to outperform from market perform and Merrill Lynch raised its rating Thursday -- after the markets had closed -- to buy from neutral.

"While there are still several fundamental issues -- most notably patent challenges to key products -- we believe some developments should result in multiple expansion over the course of the year," said Merrill Lynch's Gregory B. Gilbert, in his Thursday report to clients. "In addition, we believe investors are hungry to own cheap 'turnaround' stories."

The question is how fast can the $1.5 billion drug company turn around. Gilbert hopes the new management spends more time and money on research and development rather than its time-honored strategy of buying other companies and products. He added that investors "are more likely to give a new management team the benefit of the doubt when it comes to assessing the risks that the company faces." (He doesn't own shares, but his firm is a market maker in King's stock and has received investment banking fees from King within the last 12 months).

The big jump in King's stock over the past two days reflects a prevailing opinion on Wall Street that the company is an underachiever rather than a lost cause. Prior to the two recent investment banking firm upgrades, Thomson First Call calculated that six analysts had buy recommendations while 12 had hold ratings. Only one firm recommended selling the stock.

Analysts who weren't ready to change their ratings offered backhanded compliments for King's prospects.

King is showing "signs of life," said Steven Valiquette of UBS, in a Friday research note. He is keeping is neutral rating; but he moved his 12-month price target to $22 from $18 and also raised his 2004 earnings per share prediction to $1.50 from $1.45. (He doesn't own shares; his firm has had an investment banking relationship with King within the last 12 months.)

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Another analyst with a neutral rating is David W. Maris of Banc of America Securities. He told clients on Friday that King trades "at a significant discount to peers" and represented a "good long-term value" before and after Thursday's stock price surge. His 12-month price target is $21.

Maris said King's behavior Thursday in presenting its fourth-quarter and full-year earnings symbolized the vexation analysts experience with this company. Sales for one drug fell below company guidance, sales for another jumped above guidance, and King's explanations "left us wanting."

Maris attributed the stock's gain on Thursday to investors being encouraged by the change in management and the fact that King's "underlying valuation

makes it one of the cheapest companies not only in specialty pharmaceuticals, but in all of health care." (He doesn't own shares; his firm says it expects to receive or seek compensation for investment banking services from King within the next three months.)

Despite the sharp jolt to its shares, King still has a host of problems and uncertainties that are keeping most analysts on the sidelines.

The company remains under investigation by the

Securities and Exchange Commission

and the U.S. Department of Health and Human Services for underpaying the Medicaid program. Last year, the company hired consultants who determined that King had underpaid this federal-state program for the poor by $46.5 million between 1998 and 2002. On Thursday, King reported that an updated audit detected another shortfall of $18 million for this period as well as an underpayment of $900,000 between 1994 and 1997. King warned that that it cannot predict the timing and/or results of the federal investigation or if it will be assessed penalties, interest or fines related to the underpayments.

King still hasn't solved to analysts' total satisfaction the high wholesaler inventories of some products, most notably the company's best-selling drug, Altace, a drug to reduce the risk of stroke and heart attacks. The drug produced $527.1 million in sales last year -- nearly one-third of King's revenue. Analysts have acknowledged the company's efforts to reduce the inventories and have praised King for negotiating agreements with wholesalers to improve the control and management of inventories. "While this initiative could impact sales negatively in the short term, improved predictability

over the longer term is likely to help investor perception," said Merrill Lynch's Gilbert.

Several of King's top drugs -- including Altace -- will face patent challenges. "While litigation surrounding these products may take a few years to play out, it is likely to remain a cloud for some time," Gilbert said.

Many analysts see 2004 as a turning point for King, with new management, improvements in inventory and more money devoted to R&D. Still, the hopes for the new King are tempered by the memories of the old King.

"Unfortunately, we do not have a rating for investors with a very high tolerance for variability and uncertainty for a company trading at a major discount," said Banc of America's analyst in a recent report to clients. "For those with such tolerance, King is likely to perform well over the longer term. For those looking for solid positive trends, King's uncertainty warrants some caution."