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King Pharmaceutical is a high flyer that has come down to earth, and attracts my attention primarily because of a strong sales force and balance sheet, together with proactive management. The stock is trading in the vicinity of 52 week lows, 9.xx today, based on the fact that most of the company's key products will lose patent protection in the near future. Following the loss of a patent case, the company has reorganized, slimmed down, and focused its priorities on areas where it is most competitive. The R&D pipeline has some promising candidates, and management has done well by in-licensing in the past. Based on what I regard as a well thought out strategy, implemented vigorously, and the possession of ample resources, I think the situation warrants a small position due to the potential for resumed growth in revenue and leverage on the reduced expenses.
From the 2007 10-K: Accelerated Strategic Shift - Following the Circuit Court's decision in September 2007 invalidating our Altace® patent, we conducted an extensive examination of our company and developed a restructuring initiative designed to accelerate a previously planned strategic shift emphasizing our focus on specialty-driven markets where we have core capabilities and assets, specifically the neuroscience, hospital and acute care markets. This initiative included a reduction in personnel, staff leverage, expense reductions and additional controls over spending, reorganization of sales teams and a realignment of research and development priorities. Pursuant to this initiative, we terminated approximately 20% of our workforce, primarily through a reduction in our sales force. We have incurred total costs of approximately $65.0 million associated with this initiative. We estimate that the 2008 selling, general and administrative expense savings from these actions will range from $75.0 million to $90.0 million.
I visted their web-site and located a nice writeup of the R&D strategy, which they call virtual R&D. That means a kind of outsourcing and partnership approach whereby they utilize the strengths of outside organizations rather than attempt to maintain inside capabilities. This may permit them to focus their R&D on areas that they think will be productive, rather than on what their in-house people are skilled at. It also should reduce expenses in that money is not spent on research people who are between projects, etc.
I don't put much emphasis on trying to second-guess pipeline reults, there are plenty of people better informed than me and I'm not sure they do real well either. That having been said, I think the company's focus on pain management and specifically abuse resistant opiods is well thought out - the argument from demographics, an aging population afflicted with chronic pain, the growing awareness of the amount of prescription meds that gets out on the street, etc.
While the future is uncertain here, the price affords some margin of security in that it is a little below book value and there is a lot of cash. If management succeeds in their strategy, I don't think 16 or 17, (from today's 9.xx) is unrealistic. I am accumulating a small position and monitoring the news.
Tom
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