King Pharmaceuticals recently
announced earnings for the quarter that ended on 31 December 2008. This post provides the
GCFR analysis for the period, which was the fourth quarter of the fiscal year.
On 29 December 2008, King
completed the $1.6 billion acquisition of
Alpharma, Inc. (
NYSE: ALO), and Alpharma became a wholly owned subsidiary. A $600 million charge due to the purchase resulted in King reporting substantial net losses for the fourth quarter and full year.
The
press release announcing these results did not include complete financial statements and notes. We will reevaluate our analysis when the information becomes available in the company's
10-K filing.
King Pharmaceuticals, Inc. (
NYSE: KG) manufactures and sells various
brand-name prescription pharmaceuticals. Headquartered in
Bristol, TN, King now focuses on
specialty products for the
neuroscience, hospital and
acute care markets.
To gain
Federal Trade Commission approval of the Alpharma acquisition, King sold the
KADIAN drug for $127.5 million to Iceland's
Actavis. KADIAN, which was responsible for
23 percent of Alpharma's total revenues in 2007, is used for the treatment of moderate to severe chronic pain.
King
reported on 21 January 2009 that the
U.S. District Court for the Eastern District of New York invalidated two U.S. patents relating to
SKELAXIN® (metaxalone), a muscle relaxant. King plans to appeal the Court's order. In the first nine months of 2008, King's SKELAXIN sales were $333 million, which was 29 percent of the company's Net Sales during this period.
Given the Alpharma acquisition and the SKELAXIN decision, it is not terribly surprising that King announced
cost-cutting workforce reductions affecting about 22 percent of its employees.
King must have been bitterly disappointed when, last December, the
U.S. FDA asked for
additional non-clinical data on the abuse-resistant painkiller
REMOXY King is developing with
Pain Therapeutics, Inc. (
NASDAQ: PTIE).
These recent setbacks came not long after King suffered its greatest reversal. In 2007, the
U.S. Court of Appeals invalidated King's patent for
Altace® (Ramipril). This
ACE inhibitor, used to treat patients with
cardiovascular risks, had accounted for roughly 1/3 of King's net sales. The Court's decision resulted in King recognizing
asset impairment charges (covering
intangible assets and inventory) totaling $250 million and King
laying off 20 percent of its staff.
Three months ago, the GCFR
Overall Gauge of King Pharmaceuticals increased from 50 to 74 of the 100 possible points. Our
analysis report on
the September quarter explained the results in some detail. (Note that the scores are not exactly as reported originally because of some changes to our algorithms.) Despite
Revenue in the third quarter falling almost 30 percent, the score rose primarily because the sinking price per share made the valuation appear more attractive. In addition, our gauges reacted positively to decreasing operating expenses as a percentage of Revenue.
Now, with the data from the December quarter, our
gauges are displaying the following scores:
Before we examine the factors that affected each
gauge, we will review the latest quarterly
Income Statement and compare it to
our previously communicated expectations.
Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
http://sheet.zoho.com/public/ncarvin/kg-income-statement?mode=html
Revenue in the fourth quarter was 34.8 percent below that in the December 2007 period, and it fell below our estimate by 6.7 percent.
Sales of Altace in the fourth quarter dropped from $166 million to $14 million.
Full-year Revenue plunged 27 percent from 2007 to 2008.
The
Cost of Goods Sold (CGS) -- Cost of Revenues on King's Income Statement -- in the quarter was 26.9 percent of Revenue, which translates into a
Gross Margin of 73.1 percent. Our target for the margin, based on guidance provided earlier by company management, was 74 percent.
Depreciation and Amortization expenses were consistent with the earlier guidance. These expenses were 8.5 percent of Revenue
Research and Development expenses were 9.1 percent of Revenue, and they were a substantial $7 million less than the $39 million we anticipated. Our target was based on management's guidance this past November that
R&D expenses in 2008 would be about $150 million.
Sales, General, and Administrative (SG&A) expenses were 30.2 percent of Revenue. Our target had been 28 percent. However, since Revenue was less than we expected, actual SG&A expenses equaled the amount we projected. Co-promotion fees for Altace dropped from $37 million to $3 million.
In the December 2008 quarter, King recorded asset impairment, restructuring, and other operating charges of $610 million. The lion's share of this amount was $593 million for
in-process R&D associated with the Alpharma acquisition. Not having any data to forecast this charge, we had anticipated special charges of (only!) $44 million.
The huge charges dropped
Operating Income, which is total sales less all operating expenses, to a $522 million loss. However, if special items are excluded, Operating Income was $87 million. This figure is better than we expected, and better than in the December 2007 quarter.
Net Non-Operating (primarily interest) Income was a few million less than forecast, but there was also an unanticipated $7.5 million investment loss.
Given the pre-tax loss, the income tax rate is immaterial. However, when special items are excluded, the income tax rate was 33 percent. The guidance was 34.0 percent.
Net Income on a GAAP basis was a $548 million ($2.25/share) loss. Non-GAAP income was $49 million ($0.24/share), which was $0.07 per share better than our projection.
* calculated with estimated data for 2008-4Q
During the fourth quarter, King's holdings of Cash were cut by $290 million, Short-term debt and the currently due portion of Long-term Debt went from 0 to $444 million, and the rest of Long-term Debt increased from $400 million to $963 million. These figures sum to $1.3 billion, so it is safe to say that the changes were, more or less, associated with the
$1.55 billion spent to acquire
Alpharma.
The acquisition, therefore, is the principal explanation for the big drop in the Current Ratio, the big increase in the Debt levels, and the reduced Working Capital. However, the new numbers are not especially alarming, and we would expect King to refinance a big chunk of short-term debt to long-term paper when market conditions allow.
The large rise in inventory may be in preparation for new product launches, but it might also signify the extent to which sales were less than management expected.
Growth rates are trailing four quarters compared to four previous quarters.
* calculated with estimated data for 2008-4Q
With rapidly declining sales and decelerated Cash Flow, Growth isn't a big part of the current landscape at King. Negative Net Income, as a result of special charges, makes growth rates for the measure irrelevant.
* calculated with estimated data for 2008-4Q
Operating Expenses are distorted by the special charges. If these are ignored in all time periods, Operating Expenses decreased from 73 percent of Revenue in 2007 to 72 percent in 2008.
* calculated with estimated data for 2008-4Q
King's stock price rose over the course of the quarter from $9.58 to $10.62. The valuation ratios above can be compared with other
Drug Manufacturers.
| Overall | December 2008 | 3 months prior
| 12 months prior
|
| Gauge Score (0 to 100) | 25
| 74
| 66 |
The big news of the fourth quarter for King Pharmaceutical was the closing of its acquisition of Alpharma. King used funds from its cash war chest and took on additional debt to pay the $1.5 billion price for this purchase. (Was it worth it given the forced Kadian divestiture?)
Almost 40 percent of the acquisition price was written off as an in-process R&D expense.
Over the longer term, the invalidation of two U.S. patents relating to
SKELAXIN® (metaxalone)
might prove to be more important.
Revenue in the fourth quarter fell by 34.8 percent, and full-year Revenue plunged 27 percent from 2007 to 2008. Greatly reduced sales of Altace was the dominant reason sales dropped.
After the
Altace decision, our rearward-looking gauges were painting a too rosy view of King Pharmaceuticals. However, the latest acquisition costs are having the opposite effect on the
Overall Gauge. When we revisit King after it files a 10-K report, we will see if we can improve the realism of the scores.
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