M&A

Restatement Threatens Pharma Acquisition

King Pharmaceuticals will restate two-and-a-half years of results; Mylan Laboratories has an out, if it wants one, on a $4 billion deal.
Stephen TaubDecember 10, 2004

The $4 billion acquisition of King Pharmaceuticals Inc. by Mylan Laboratories Inc., which King agreed to in July, is in doubt after the maker of generic drugs announced that it will restate its financials for the past two-and-a-half years.

Last month, after King first warned that it might need to revise its results, corporate raider Carl Icahn — who owned about 9.78 percent of Mylan’s stock at the end of the third quarter, tried to block the deal. Hedge fund manager Richard Perry, the largest Mylan shareholder at 9.89 percent, has publicly supported the deal. He also owns 2.9 percent of King’s stock.

In a statement, King noted that the acquisition is subject to certain conditions, including one that would permit Mylan not to close the merger if there were a restatement of King’s financials. This technical violation would also allow Mylan to avoid paying King an $85 million breakup fee, reported the Associated Press.

King added that Mylan has not notified the company whether it plans to proceed with the transaction. The AP noted, however, that Mylan is not expected to “use the escape clause.”

According to its statement, King’s restatement is due to methodological flaws concerning the timing of expense recognition for product returns following the implementation of inventory management agreements with wholesale customers.

The primary effect of the restatement will be to record in prior periods expenses relating to product returns, as well as other items, that previously were or would have been recognized during the first nine months of 2004.

King said the restatement will increase net sales for the first nine months of 2004 by $54.3 million and net income by $36.5 million. For 2003, the restatement will reduce net sales by $16.5 million and net income by $13.9 million. As for the remaining $37.6 million of net sales and $23.8 million of net income, the company added that it is still determining whether those amounts should be reflected entirely in 2002 or in 2001 as well.

The restatement is not related to a current investigation by the Securities and Exchange Commission, according to King. Last year the SEC subpoenaed drug-pricing records and other documents involving sales by the company in 1999 and 2000 to mail-order pharmacy VitaRx and health-care company Prison Health Services, according to the Associated Press.

King’s restatement is also unconnected to a probe by the Department of Health and Human Services, according to King. The department’s Office of the Inspector General has subpoenaed documents involving sales, marketing, and other business practices for several drugs, reported the AP.