King Pharma may be bargain amid generic threat

NEW YORK (Reuters) - King Pharmaceuticals Inc. KG.N shares may be a bargain for investors willing to bet the specialty drugmaker can hold off generic competition to one of its biggest drugs, the muscle relaxant Skelaxin.

King shares have climbed more than 16 percent in 2007 to nearly $19, outperforming most other pharmaceutical companies. But the stock is still far off historic highs from several years ago and may have room to rise, analysts said.

"Skelaxin is going to be the biggest source of an upside surprise," said Natexis Bleichroeder analyst Corey Davis, who has a $21 price target on the stock. Skelaxin is King's second-biggest selling drug and expected to exceed $400 million in sales for 2006.

Brokerages Morgan Stanley and J.P. Morgan lifted their ratings on the stock this month, while even analysts who are cautious on King concede it is cheap relative to other specialty drug makers based on price-to-earnings ratios.

The U.S. Food and Drug Administration's approval in December of a new prescribing label for Skelaxin has boosted confidence in King's position. Also, some analysts say slow progress by generic drugmakers seeking to challenge Skelaxin's patent in court should extend King's grip on the market.

Avoiding competition for over two years may buy King time to develop a franchise-extending form of the drug, Davis said.

Morgan Stanley analyst Michael Rockefeller believes Skelaxin "will be around until at least 2009, whereas most sell-side analysts see Skelaxin going generic in 2007."

Rockefeller raised his rating on King stock to "overweight" on February 12, and boosted his price target to $23.

"If we are right on Skelaxin, consensus estimates for 2007 and 2008 will need to increase," Rockefeller wrote in a note.

Even if he is wrong about the drug's exclusivity, King's share price includes much of the risk from an earlier generic entry, Rockefeller said. He said the shares could also be supported by market speculation over a possible leveraged buyout, with King desirable because of its "robust" cash flow.

DISCOUNT ON SHARES

But others question King's long-term prospects as its top Altace franchise and third-biggest product, Thrombin-JMI, both face an uncertain competitive landscape.

Blood-pressure drug Altace is seen losing patent protection by late 2008 or 2009, while a competitor to Thrombin-JMI, used to stem blood flow in surgery, could hit later this year.

Only one analyst has the equivalent of an "outperform" rating on King stock, according to Reuters Estimates. Seven have "hold" ratings and three deem it "underperform."

"There probably is still some upside, but there's a lot of potential for volatility here," said Michael Castor, a portfolio manager with healthcare fund Sio Capital Management.

Bristol, Tennessee,-based King, which is set to report quarterly results on February 28, may be best known for its near takeover by Mylan Laboratories MYL.N, a $3.8 billion deal that collapsed in 2005 after investor Carl Icahn opposed it.

King's revenue is expected to surpass $1.9 billion for 2006, more than twice as much as in 2001. But analysts expect earnings, excluding items, to tumble from $1.70 per share in 2006 to $1.24 in 2009, according to Reuters Estimates.

Shares are far from the $45-a-share heights they hit in 2001. They trade at a 44 percent discount to a group of peers, including Cephalon Inc. CEPH.O and Endo Pharmaceuticals Holdings Inc. (ENDP.O), J.P. Morgan said in a note last week.

A winning scenario would be if King's products keep its performance stable until newer and experimental medicines, including two pain drugs, make a splash. Those hopes rest largely on Skelaxin, for which King bought rights in 2003. The drug relieves pain from strains, sprains and other muscle injuries.

"Skelaxin is probably their most profitable product," Cowen & Co. analyst Ian Sanderson said. King could keep earnings at about $1.70 to $1.75 per share through 2008 if it can stave off a generic Skelaxin, he said.

The drug has been available for decades, but King has a patent until 2021 involving its use when taken with food. In 2004, the FDA said it would not require makers of potential Skelaxin generics to discuss the food interaction in their prescribing label, easing the generic approval process.

King filed a petition with the agency objecting, but investors began bracing for generic competition. Then in December, the agency approved a new label for Skelaxin including information on food effects, raising investor hopes the FDA might not be so quick to approve generic versions.

"Even though there's no precedent here for the particular challenge that's going on with Skelaxin, that incremental change was viewed as heartening by some or at least tipping the balance slightly in favor of King," said BMO Capital Markets analyst Robert Hazlett, who rates the stock "market perform."

King spokesman David Robinson said the company was pleased with the FDA approving the revised label "but there's no way to anticipate the effect" on King's petition.