Remember when I said back in July that Mylan Labs (NYSE:MYL) was getting "a steal" in King Pharmaceuticals (NYSE:KG)?
Well, King's most recent quarter and its potential need to restate earnings have put the whole thing in jeopardy. Let's start with the quarter first. King announced revenues of $27.6 million, or $0.11 per share, a drop of 74% from last year's results. King offers some adjustments that would get the operating earnings up to $0.20 per share, but let's not quibble -- the quarter was horrible. Revenues dropped 16% to $353 million. The company made new inventory management agreements that have resulted in higher product returns. This, of course, makes the current quarter look pretty bad, but it also puts into question whether revenues in previous quarters were properly booked.
King's press release for the quarter stated that it was "considering whether any of its returns reserve accrued during the first nine months of 2004 should have been recognized in years prior to 2004, and, if so, the relevant amounts." If it determines that they should have been, then it puts King in default of one of the conditions of its proposed $16.61 per share merger with Mylan.
Further, it would mean that this quarter's release may actually turn out to be worse in comparison with last year's. Think about it -- if some of the revenues from earlier this year should have been booked in years previous, then wouldn't that mean that last year's revenues might be understated, perhaps substantially so?
Mylan's Chief Executive Robert Coury stated that Mylan has just learned about the potential restatement and that the company will need to have a better understanding of the situation before it determines what it will do next.
King is no stranger to such controversy. Also ongoing is the investigation into charges by the Securities and Exchange Commission that the company underpaid Medicaid. Yesterday, King described a possible settlement that would state that King accrued $130 million in monies owed Medicaid, but that neither the company nor its officers would face criminal charges. King is not sure whether this result can be achieved.
Keep an eye on this -- people have been pointing to a big arbitrage difference between the King share price and the Mylan merger price. It now stands at more than 35%. It seems in this instance that those who believed that the merger was at risk have been proven correct. It doesn't mean that the merger won't happen, just that it's deeply at risk.
See also:
- Zeke Ashton's "King Makes a Comeback"
- Bill Mann's "Mylan's Thorny Crown"
- Bill Mann's "The Drug Reimportation Disaster"
Bill Mann owns none of the companies mentioned in this story. Furthermore, he keeps wanting to call the stuff that they make balloons from "Mylan," but that's not right either.
