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Greg Hollander

KG AT A GLANCE

P/E ► -5.92   EV/EBITDA ► -21.1   ROA ► -11.6% AVG ROE ► -18.9% AVG Debt to Equity ► 0.486 AVG Current Ratio ► 2.23 AVG Interest Coverage Ratio ► -4.43 AVG

 

 

 

 

 

 

Founded in 1994, King Pharmaceuticals has historically generated revenue from the sale of pharmaceutical products developed by other companies. Smaller pharmaceutical companies with promising, high-potential drugs often make money by partnering with companies that have large, well established sales teams. They then collect royalties as a percentage of total products sales. King's smaller sales force limited the company to the acquisition of mature products with with declining sales. While these products were already FDA approved and therefore less risky than products that were still in development, their upside was also limited. Over the past three years, a growing sales force combined with greater developmental capabilities have made it possible for King to acquire rights to newer products with greater long-term revenue potential. The company now focuses on the development of its own pharmaceuticals as well as the development of early-stage products discovered by other companies.^[1]

In 2007, 66% of King’s revenue came from the sale of three main products: an enzyme inhibitor Altace (33% of revenue), muscle relaxant Skelaxin (21%), and Thrombin-JMI (12%). With the patents for Altace and Skelaxin due to expire by the end of 2008, several consulting firms predict that generic competition could decrease revenue from these products by up to 75%.^[2].

Company Overview

King Pharmaceutical’s revenue has increased over 50% from $1.304 billion in 2004 to $1.989 billion in 2006. This is due in large part to its shift towards internally developed products in its “branded pharmaceutical” segment (see below) due to a new focus on products with higher revenue potential.^[3]

Operating income has also increased substantially over this time period, growing from a $41 million loss in 2004 to a $402 million gain in 2006.^[4] These profits have allowed King to steadily reinvest in Research and Development, an important piece of their future considering that upcoming patent expirations will leave the firm’s current products subject to generic competition.

King Pharmaceuticals has four major business segments.

• Branded Pharmaceuticals manufactures and markets therapeutic products. Almost 50% of revenues in this segment relate to the sale of cardiovascular and metabolic drugs, and 29% is comes from the sale of neuroscience drugs. In fact, King’s five top-selling products are produced in the branded pharmaceutical segments. This includes Altace, a therapeutic treatment for hypertension and used for patients over the age of 55 to reduce the risk of stroke, heart attack, and death from cardiovascular causes (33% of King’s revenues); Levoxyl, a therapeutic for thyroid hormone replacement (6% of total revenue); Skelaxin, therapeutic muscle relaxant used for pain relief in patients with acute musculoskeletal conditions (21% of total revenue); Sonata, an insomnia treatment (4% of total revenue); and Thrombin-JMI, a topical solution used to help stop minor bleeding, or hemostasis (12% of total revenue).^[6]

• The Meridian Medical Technologies segment sells auto-injectors, pen-like devices that are pre-filled with a precise dosage that can be automatically injected into the patient.

• The Royalties segment generates revenue from the third-party sale of two drugs, Adenoscan and Adenocard.

• The Contract Manufacturing segment manufactures drugs patented and controlled by other companies.

King Pharmaceuticals Annual Report^[8]

King Pharmaceuticals Annual Report^[9]

King Pharmaceuticals Annual Report^[10]

Trends and Forces

Shift from mature products to pharmaceuticals with higher risk/reward increases exposure to development risk - For the first 10 years of its existence, King Pharmaceuticals acquired and sold mature products that were typically later in their life cycle; when King purchased the products and began marketing them as their own, it found sales to be steadily declining. King was limited to more mature assets due to a weak sales team - companies with younger, more promising drugs looked towards firms that would be able to generate the maximum amount of revenue (and thus a maximum amount of royalties for the developer). Since its inception, the company's sales team has grown large enough to allow it to attract "younger" products. As a result, King has shifted its strategy toward acquiring the rights to products still in development.

Patent expirations increase exposure to drug development risk - While King currently manufactures many FDA-approved products, several of the company’s best-selling drugs (including Altace and Skelaxin, a combined 54% of their revenue) will likely face generic competition by the end of 2009, and some firms expect the sales of these drugs to decline by as much as 75%. As such, King Pharmaceuticals has shifted its capabilities to internally develop new products. Its future financial success is contingent upon the clinical success of its current pipeline, including four products in Phase III trials and two products in late Phase II trials.^[11] Several products in this category are an abuse-resistant pain killer called Remoxy, a cardiac stress imaging agent called binodenoson, and an epilepsy treatment called Vanquix. While these products may be relatively late in development, King itself notes in its filings that drug candidates run the risk of failure in any stage of the process, and even thoroughly tested product candidates can fail to receive FDA approval.

"Surge capability provision" of government contract may cause strain on production capabilities - Products in King’s Meridian Medical Technology segment, which accounted for nearly 10% of the company’s revenue in 2006, are sold primarily to the U.S. government’s Department of Defense (DoD) as a military supply. While King currently believes that these contracts will be renewed upon expiration, all DoD contracts may be unexpectedly terminated at the government’s convenience. The specific contract signed by King also has a “surge capability provision,” which mandates that King must increase their sales to the government in the event of mobilization or rapid military deployment. If this occurs, the company will be forced to use their production capabilities for this purpose and may be forced to decrease the manufacture of higher-profit products.^[12]

Competition

As an acquirer of developed (or developing) products, King Pharmaceuticals competes with many other pharmaceutical firms, including large industry leaders such as GlaxoSmithKline (GSK) and Merck (MRK).

As a specialty pharmaceutical company, King primarily faces competition that is developing or producing similar products, on a product-for-product basis. In other words, the capability to develop drugs will not necessarily lead to future financial success unless those drugs are cheaper or more effective than similar drugs on the market. In King’s case, their products also face – or will face – a significant amount of competition from generic drugs as their patents expire. As such, an overall financial look at other specialty pharmaceutical companies is not complete, and it is most useful to first consider King’s competition for each of their major products.

Cardiovascular/Metabolic Therapeutics

Altace - Altace, which is responsible for 33% of King’s current revenue, is a cardiac hypertension treatment. Altace faces what King refers to as a “very competitive and highly genericized market.” More specifically, both Cobalt Pharmaceuticals and Lupin have filed certifications with the FDA challenging King’s patents and requesting the right to market their own generic versions.^[13] If the generic versions are approved, Altace will face equally effective and significantly cheaper competition.

Levoxyl - Levoxyl, King’s therapeutic for thyroid hormone replacement, faces strong competition in several other products also made with the levothyroxine sodium compound. These products include Abbot's Synthroid, Alara Pharmaceutical’s Levo-T, and Institute Biochimique’s Tirosint, among others.^[14]

Neuroscience

Skelaxin - As a therapeutic muscle relaxant, Skelaxin (related to 21% of King’s revenue) also faces a highly genericized market. More specifically, Novartis' Eon Labs, CorePharma, and Mutual Pharmaceutical Co have all filed with the FDA seeking the rights to market and sell a generic version of the drug.^[15] Consulting reports see this right being granted by the end of 2008.

Sonata - As an insomnia treatment, Sonata faces competition from drugs such as Sanofi-Aventis’ Ambien and Sepracor’s Lunesta that also work to treat the same problem. Sonata faces future competition from generic versions as well, as Teva Pharmaceutical Industries (TEVA) has already filed with the FDA to seek approval for sale of the generic version of the medication.^[16]

Hospital/Acute Care

Thrombin-JMI - Thrombin-JMI is a topical drug used to stop minor bleeding. While the drug does not currently face any strong competition, Zymogenics filed a Biologics Licensing Application for a similar product in 2006.^[17] Analysts expect Zymogenics to produce a potentially superior hemostasis aid by the end of 2008 and estimate its chances of approval at 80%, which would cause Thrombin to lose a significant amount of market share.

A Brief Comparison

1. ↑ King Pharmaceuticals - About Us
2. ↑ King Pharmaceuticals, Inc. Morningstar Analyst Report
3. ↑ 2006 10-K, Consolidated Statement of Income, page F-4
4. ↑ 2006 10-K, Consolidated Statement of Income, page F-4
5. ↑ 2006 10-K, Consolidated Statement of Income, page F-4
6. ↑ 2006 10-K, Branded Pharmaceuticals Segment, page 8
7. ↑ 2006 10-K, Business Segments, page 3
8. ↑ 2006 10-K, Business Segments, page 3
9. ↑ 2006 10-K, Branded Pharmaceuticals, page 7
10. ↑ 2006 10-K, Branded Pharmaceuticals, page 7
11. ↑ 2006 10-K, Research and Development, page 40
12. ↑ 2006 10-K, Risks Related to Business, page 31
13. ↑ 2006 10-K, Risks Related to Our Business, page 18
14. ↑ | Table of Approved Levothyroxine Sodium Oral Formulations, CDER
15. ↑ 2006 10-K, Risks Related to Our Business, page 18
16. ↑ 2006 10-K, Risks Related to Our Business, page 20
17. ↑ 2006 10-K, Risks Related to Our Business, page 20
18. ↑ Lupin Homepage
19. ↑ TEVA 2006 20-F, Operating Data, page 2
20. ↑ ZGEN 2006 10-K, Statement of Operations Data, page 43