K V Pharmaceutical Company (KV-A)

On September 21, 2009 at 11:14 PM, ChrisGraley (99.23) wrote:

Solaris asked to put forth a better pitch for this stock so here goes...

KV.A has currently has 3 major brands that they sell.

The Ther-RX brand is devoted to women's health care. It has 3 major products. Gynazole and Clindesse are both anti-infectives and Evamist is used for estrogen therapy. These 3 products provide about 40% of KV's renenues and revenue growth for these products was 15% in fiscal year 2008 and 30% in fiscal year 2007.

The Ethex brand handles KV.A 's generic products and makes up about 57% of KVA's revenue. They have a ton of different products in different catagories, but 64% of their generic sales come from their cardiac drugs. Metroprolol is probably the most well known. Revenue growth in this brand was up 16% in 2007 and 56% in 2008

The Product Dynamics brand markets a few trade-marked ingredients to the pharmaceutical and nutrition industries. It is currently about 3% of revenues and a growing but currently negligible part of the company.

In August of 2008, FDA seized $24M worth of unapproved drugs from KV-A after an earlier inspection revealed that the ingredient guaifenesin was still being manufactured by KV A in a time released format after the FDA released a statement that using the drug in a time released format would first require further FDA approval. The drug is used to thin mucus and is found in common in cold and flu products such as Mucinex or Theraflu. The FDA required companies to stop manufacturing the affected products before Aug. 27, 2007, and to stop shipping the products before Nov. 26, 2007.

In November 2008 KV.A neglected to file it's annual report stating that the pending government action would adversely effect it's future earnings.

In January of 2009 a class action lawsuit was filed by share holders against KV.A. At about the same time, KV-A voluntarily suspended manufacturing and shipment of all of it's products.

In February 2009 KV.A reduced it's workforce by 700.

In March 2009, the company agreed to an injunction from the FDA to stop manufacturing and shipping all drugs until they receive approval from the FDA on good manufacturing practices. The injunction binds the company's executives to remain in FDA oversite for a period of 5 years. It also delays all other drugs that they have in the FDA pipeline.

There's lots of other stuff in between, but I'm going to switch to September 2009 now. KV.A has rehired their workforce and received approval from the FDA on good manufacturing practices. They are starting up manufacturing and just sold the ACNE cream ANDA to Perrigo for $14M plus $2M in milestones. The agreement also transfers the responsibility for litigation with Glaxo Smith Kline to Perrigo. This allows KV.A to remove expenses related to this litigation from it's balance sheet. GSK makes Duac which ANDA clones in the generic version.

Ok now my analysis...

This company is currently priced at 0.3 price to book value and it's priced that way for a reason. The company itself pondered it's ability to continue to do business when the FDA swooped in. It fired it's former CEO, and it's CFO just stepped down recently. If it would have filed it's last annual report on time, there is a big chance that it would be in bankruptcy right now. All that being said, this company has turned the corner. You've seen the previous growth rate that I posted above. They also have a some drugs that were delayed in the FDA pipeline that are now being considered as well. They should see a surge in growth as these drugs get approved. They got caught doing what most drug companies have been doing to a lesser extent at a time that the FDA wanted to prove a point that they were cracking down. They will now have the best manufactoring processes for the next 5 years.

OK, so we have a $27 stock that was quickly headed to $50, That stock got caught with it's pants down. It paid a price. A very big price! It's making the same drugs that were very popular before. Fortunately, it managed to melt down right before the economy tanked. If it went bankrupt today, you'd still make money. The play on this is an old fashioned Benjamin Graham type purchase.

OK, now a couple of negatives...

First, the class action suit is still out there. I'm not as worried about it though, because even if the shareholders win, a penalty will be assessed based on the current valuation on judgment and not the future valuation. The previous CEO has a big threat of errors and omissions or negligence in a civil trial, but that doesn't effect the stock. The second thing that bothers me is that the former CEO is still the board chairman and in control of the majority of voting shares of the class B stock. He's responsible for the short cuts in the past, but he's also responsible for some shrewd business decisions that caused the KV.A growth in the past. He is currently jockeying for position to get a little of the control that he had as CEO back as chairman. The only thing that worries me is that he will continue to take the same short cuts of the past to cut production costs. Thanks to the FDA, I don't have to worry about that for the next 5 years.

This is a little more of an involved pitch Solaris, and it is definitely longer, but this pitch should really only be 2 words.

"Free Money!"

I hope that you approve.

Expect EPS comps to look very good, and chart looks like it is ready for a run-up after fairly tight price range lt

I don't think that this stock may have a little run based on artificial media hype, but don't believe the company has really that much to offer to create solid stock gains. So they are developing products to save money in manufacturing supplements and drugs and are also marketing generics. Big deal. There's safer and better places to put my money.

Just watching. Drug company.

Betting on Caps that they get their approvals and start rolling again. Not putting real money on it.

I recently purchased this stock in the $3 range. When you subtract out the companies somewhat recent negatives i.e. law violations etc.. the companies long term fundamentals & profitability appear to be intact. I like the upside, it certainly has been beat down.... with the potential to rise again.

Just getting into stocks. This got realy go reviewd from muliipule reviews.

Healthcare stock will outperform the egeneral economy

BASED ON THE NUMBERS I SEE THIS STOCK EXTREMELY UNDERVALUED. i SEE THIS STOCK AT 20. AT LEAST WITHIN A YEAR. HOWEVER THIS COMPANY HAS HAD AN ISSUE WITH THE FDA WHICH IS APPARENTLY RESOLVED. THE ONLY REASON I CAN SEE FOR THIS STOCK TO UNDERPERFORM IS IF THE FDA MESSES WITH THE COMPANY. WHICH I THINK IS VERY UNLIKELY. TOO MUCH UPSIDE AND MINIMAL RISK NOT TO JUMP ALL OVER

It looks really good long term, I see it going right back to it's mean or higher in next couple of years.

Shooting dead fish in a barrel could not be easier than making money on this stock!!

This one is starting to get some attention. It is at the top of my watch list so I'm giving it a go. Hard to look at the ratios so it is a blind pick.

HT AllStarPortfolio

This is a fantastic stock! can't go wrong with this pick! Show me the Money like Jerry MaGuire!

This company has been around for a while, and survived some challenging markets. The issues with the FDA will turn out to be a cloud with a silver lining. Any corporation or organisation that survives the rigours of an FDA intervention, is a stable and attractive stock pick. KV.A is already showing signs of revitalisation.

In reading the SEC filings and the FDA citations, this company on a wholesale basis at almost every site they manage has undermaintained equipment, responded inappropriately or not at all to quality concerns, and run their machinery at rates that were higher than equipment capacity. IMHO this can only mean one thing: lack of attention to quality, excellence and ethics at the highest levels. Read the filings and statements. Each filing for why financial statements are not produced have the statement saying the company has doubts whther or not it will continue to be a "going concern:. This statement is one they legaly must make if they are not sure they will be able to keep the company solvent. Not sure how they will with no production to speak of for most of 2009, recalls, and no current for sale production. This is a long shot people...wait to see how the trials go and whether their board of directors changes. BTW, a good way to post industry leading profits for the short term is to do the things the FDA cited them for...

Taking a flier on these guys. Don't have much history on them, but fundamentals appear solid for the time being. Good buy under $5 in my opinion.

Infrastructure problem will be fixed

This should yield some good profits.. They still have some road bumps ahead with the FDA action but, generics are the future.