Buying King Pharmaceuticals

King Pharmaceuticals (KG/NYSE) is the new portfolio position established today. I bought the stock at $9.98 per share and it closed at $9.99. King makes and markets prescription drugs.

I got in at just a tad under stated book value, and the company has a strong cash position, with more than $5 a share in cash and investments. Market cap is about $2.5 billion with 246 million shares outstanding. There is no dividend.

King traded as high as $21.79 a year ago. The stock has dropped in price dramatically since then. Primarily because it lost patent protection for its largest drug (a heart drug called Altace) in 2007 and worries that its second-largest drug (Skelaxin) will face generic competition in the near future.

King's strategy is to acquire older branded drugs no longer being promoted by their originators. King then uses its salesforce to increase sales of these drugs through effective marketing. Look for the company to use its significant financial resources to seek new product opportunities. In particular, King is on track to file three New Drug Applications this year -- most notably for its abuse-deterrent oxycodone formulations (Remoxy and Acurox). These could be major drivers of future growth.

Of the value players I follow most closely, Francis Chou is a holder of King Pharmaceuticals stock. As of March 31 he lists it as the biggest equity holding in his flagship Chou Associates Fund. Prem Watsa and Fairfax Financial also own the stock (not very surprising since Chou used to work for Fairfax).

At the current stock price, investors assume the worst case scenario for King: that it will lose patent protections for its major profit makers while achieving no replacement revenues. I don't believe that is the likely outcome and have placed my bet.

But please do your own due diligence before jumping in. There is always risk with government regulatory authorities and the company's pipeline drying up.