A Compelling Case for King Pharma

We believe new management at King Pharmaceuticals (KG: $19) has done an admirable job so far in rectifying the company's past woes, defending its key franchises, and expanding the product portfolio. While King is expected to eventually face significant patent erosion on key products in the years ahead, we believe new product development projects, especially in the area of pain management, bode well for long-term growth. We also see future prospects enhanced by additional product acquisitions or in-licensing opportunities, which would be financed through ongoing strong cash flow and the company's over $900 million in cash.

King stock presently trades at deep discounts to peer specialty pharmaceutical companies on key valuation metrics such as p-e (price-earnings) and price-to-sales. We think the wide gaps in these valuations should narrow as the company succeeds in defending key franchises and in-licenses other growth drugs. The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).