Mylan, King Earnings Fall

The two drugmakers are planning to merge in a $4 billion deal, but new questions arise.
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Updated from 9:56 a.m. EDT

Mylan Laboratories

(MYL) - Get Report

said Thursday that the latest financial disclosure from

King Pharmaceuticals

(KG)

might violate the terms of Mylan's agreement to acquire it.

King said Thursday that its third-quarter earnings results should be considered preliminary, raising a question about whether it would have to restate financial statements.

Mylan "is currently assessing certain disclosures in King Pharmaceuticals' earnings release relating to

product returns reserves, which King indicated could lead to a restatement" of financial results, Mylan said Thursday.

"Although a restatement would result in a failure to satisfy a condition to close the pending Mylan-King transaction, the company has made no decisions and intends to evaluate the issue as additional information becomes available," Mylan said.

Robert J. Coury, Mylan's vice chairman and CEO, said his company will update investors "when appropriate." Coury told analysts in a telephone conference call Thursday that "we are limited in what we can discuss" regarding King. He said Mylan learned about King's latest financial issues within the last 48 hours.

However, Coury said that "nothing has changed in terms of our strategy," adding that the acquisition is the "most viable option" for Mylan's shareholders. It's important, he added, to separate King's assets from "all prior issues" regarding King's previous management.

Coury said the purchase agreement gives Mylan the option to pursue or abandon the deal if King had to restate earnings. The agreement says that a restatement or other "material adverse events" don't automatically cancel the deal. The agreement enables either party to cancel the transaction, under certain circumstances, by paying an $85 million breakup fee.

Coury said he couldn't provide a timetable for resolving the matter. "I don't think it's in anyone's interest to drag this process out," said Coury, adding that the King management and board of directors have been "very cooperative."

King announced earnings Thursday that fell well below the consensus estimate on Wall Street as well as its results for the same period last year.

Mylan, which also issued a quarterly earnings report on Thursday, produced results that were well below those for the same period last year.

King's announcement prompted Mylan to cancel its investor roadshow, scheduled to start Nov. 1, in an effort to promote the deal that was announced in late July.

The announcements knocked down King's shares by $1.30, or 11%, to $10.51. The stock fell as low as $10.26, which is 11 cents below King's closing stock price on July 23, the last trading day before Mylan made its stock-swap offer for the Bristol, Tenn.-based company.

Mylan's shares rose 18 cents, or 1.1%, to $17.36, which is $1.15 below Mylan's closing price on July 23.

The King announcement will serve as ammunition for opponents of the Mylan-King deal, including investor Carl C. Icahn who argues that the deal is dilutive for Mylan shareholders and too expensive.

Icahn began buying Mylan's shares on the day Mylan said it wanted to acquire King. He has since become the largest shareholder in Mylan with 8.9% of the stock, and he recently launched a proxy fight asking shareholders to oppose the deal. "King's financial future and performance are subject to significant contingencies and risks," Icahn said in his proxy statement.

UBS Global Asset Management also opposes the deal. UBS is Mylan's second-largest shareholder, owning 3.9% of common shares, according to the latest available information. UBS owns 10.5 million shares; Icahn owns 23.9 million shares.

King's preliminary results issued Thursday featured a profit of $27.6 million, or 11 cents a share, on revenue of $353.5 million for the three months ended Sept. 30. The consensus of analysts polled by Thomson First Call had been expecting a profit of $60 million, or 22 cents a share, on revenue of $370.2 million.

For the same period last year, King's third-quarter profit was $106.1 million, or 44 cents a share, on revenue of $423.1 million.

King said that as a result of the "successful implementation" of a new inventory management agreement designed to keep better track of drugs being held by wholesalers, King had "a high level" of product returns.

"Considering this high level of returns, we have determined that a thorough evaluation of our return reserve is prudent before we formally close the third quarter of 2004," said James R. Lattanzi, King's chief financial officer. "We plan to complete this process promptly."

King will determine if any of the product-return reserves accrued this year should have been recognized in previous years. If so, that would "likely result" in a restatement of financial results and a violation of the King-Mylan agreement.

Also on Thursday, Mylan issued financial results for the second quarter of its current fiscal year. Mylan already warned analysts on Oct. 21 that EPS would be below initial expectations due to heightened competition for a generic heartburn product and the delayed launch of a generic painkiller. At the time, its warning called for an EPS in the range of 17 cents to 19 cents, vs. the consensus view of 26 cents.

So, analysts cut their estimates and Mylan's actual results on Thursday either matched or fell below their revised predictions.

For the three months ended Sept. 30, Mylan earned $48.7 million, or 18 cents a share, on revenue of $307 million. The revised Thomson First Call consensus was a profit of $60.8 million, or 18 cents a share, on revenue of $329.3 million.

For the same period last year, Mylan earned $91.3 million, or 33 cents a share, on revenue of $360.1 million.

Mylan also said it expected to earn 80 cents to 90 cents per share for its current fiscal year. Analysts had been expecting an EPS of 94 cents.