Mike Murphy: King of the Hill

09/05/2003 12:00 am EST


Michael Murphy

Former Editor, New World Investor

"King Pharmaceuticals is the Hester Prynne of the pharmaceutical industry—shunned by investors and forced to wear the scarlet letter of an SEC investigation for what appears to be a modest sin," says healthcare and technology expert Michael Murphy in his Technology Investing newsletter. Here, he defends the stock.

"Questions about Medicaid pricing regarding two small customers raised by government watchdogs in March sent the shares of King Pharmaceuticals (KG NYSE) skidding over a cliff. This established firm in the high-margin prescription drug business is now trading around nine times estimated 2003 earnings, yet is growing faster than the blue chip in the AMEX Drug Index.

"King’s most important drug, Altace, treats high blood pressure. About 61 million Americans have this disease, which leads to heart disease, stroke, vascular disease, kidney failure, and damage to the eyes. Altace is an ACE inhibitor—a competitive class of drugs that block a certain enzyme, relaxing and widening blood vessels and helping to regulate blood pressure. Altace is approved to reduce the risk of stroke, heart attack, and death from cardiovascular causes in patients 55 and with a history of coronary artery disease, stroke, or peripheral vascular disease. It's the top-selling ACE inhibitor in the US.

"Its next-best seller, Levoxyl, is one of just a handful of drugs to treat underactive thyroid, and King was granted a key patent on Levoxyl this spring. Also, King acquired Meridian Medical Technologies, the nation’s leading maker of auto-injectors. These are pen-like devices filled with medicine so patients can safely and easily inject themselves. They are commonly used to treat severe allergic reactions to insect stings or bites, foods, drugs, etc. They can also deliver other drugs, like morphine for pain and antidotes for nerve gas. Meridian is the sole supplier of nerve agent antidote autoinjectors to the Defense Department.

"A more controversial investment came this year when King decided to buy Elan Pharmaceuticals’ US primary care business for $850 million. A subsequent investigation by the Federal Trade Commission into Elan’s marketing practices caused King to try to back out of the deal. In the end, they went ahead—paying $100 million less—but the entire affair soured a lot of investors. King’s recent internal audit found only a few problems, resulting in a financial restatement, but no major red flags. I expect the SEC investigation to conclude soon. Buy KG under $15 for a trade to $22 in 2004, which we could hit in six months."

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