King a Hold, Pre-Alpharma Deal

We had a Sell rating on King Pharmaceuticals, Inc. (KG) for a significant period of time based on concerns regarding top-and bottom-line growth prospects. Thanks to increased competition, generic threats, and declining prescription trends for key products, the shares declined almost 45% during this period.

King is now looking to acquire Alpharma (ALO); this acquisition would help King expand its presence in the pain management market and could help it achieve significant cost synergies. Although ALO has rejected the offer, King intends to enter into further negotiations with ALO and still hopes to close the deal by year-end.

In the meantime, we remain concerned about the long-term fundamentals of King. Although our current rating is Hold, the approval of experimental pain drug Remoxy, potentially later this year, would be a major positive for the company.  Meanwhile, King is set to file two NDAs for pain drugs Acurox and CorVue by year-end, but we do not expect significant contributions from these products, assuming they are approved prior to 2011.

Based on our financial model, we see a 5-year EPS CAGR of -16% and believe that most of the negative news associated with the stock is factored in the current share price.  Approval and launch of Remoxy, Acurox and CorVue could help turn things around in the years to come.  Our target price of $12.50 is based on 11x our 2008 EPS estimate of $1.16.

Arpita Dutt, CA, contributed to the report.

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Read the full analyst report on KG

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