Yesterday, King reported that third-quarter revenue was up 11% versus last year and adjusted earnings came in at $0.52 per share, 18% higher.
The cause of all the consternation among King shareholders was that in September, King lost its appeal of a patent case, so lead drug Altace will face generic competition next year rather than in 2012, which King had expected. Because Altace accounted for 31% of King's revenue in the third quarter, this will be a big hole in King's sales next year.
Adding to the future top-line pressure, King's other top two products -- Thrombin-JMI and muscle relaxant Skelaxin -- will face competing agents entering the market over the next few months.
After the Altace patent loss, King announced that it would reduce its spending by $75 million to $90 million next year; its preliminary guidance is for cash flow from operations to be $400 million to $450 million for 2008.
This would be down significantly from the $427 million in operating cash flow King had in just the first nine months of 2007. But after subtracting the approximately $700 million in net cash on King's balance sheet from its market cap, shares are trading at a modest five times the midpoint of its cash flow for 2008, with some interesting pipeline compounds ripening this year.
No doubt, King has some difficult operational issues ahead of it next year, but things aren't as bad as they seem if the company can reach its cash flow guidance. Even at this reduced valuation, King isn't my favorite specialty pharmaceutical company out there, but if its shares fall much more in the near term on no news, they would start to look quite interesting.