King Acknowledges Medicaid Accounting Errors; Wants Out Of Elan Deal

King has discovered errors in its Medicaid rebate accounting, the firm disclosed March 31.

King's "calculations related to Medicaid reimbursement have not technically followed the prescribed methodology pursuant to the applicable regulations," the firm said.

King received a subpoena from the Securities & Exchange Commission in March requesting information about rebate accounting and other issues (¹ (Also see "King Medicaid Rebate Data Sought By SEC; Subpoena Includes Altace Rebates" - Pink Sheet, 17 Mar, 2003.), p. 29).

"The company is taking appropriate steps to assess whether it may have overpaid or underpaid Medicaid reimbursements," King said.

The firm is also delaying its 10-K filing by 15 days. "In light of the SEC investigation, and as recommended by King's management, the audit committee of King's Board of Directors has initiated its own related internal review and has retained independent legal counsel, who has retained an independent accounting firm, to assist the audit committee," the company said.

"Because the audit committee's investigation is not complete and no conclusions have been reached, the extension provides the audit committee and its independent legal counsel with additional time to conduct a more thorough review."

King expects to increase the asset impairment charge recorded during 2002 to $76.9 mil. from $51.2 mil. based on its decision to divest the antibiotic Lorabid . "This new estimate is based on the company's most recent assessment of potential proceeds to be derived from its planned divestiture."

King announced plans to divest Lorabid in January (² (Also see "King Buys Aventis’ Synercid, Tilade, Intal; Will Add 85 Reps To Sales Force" - Pink Sheet, 6 Jan, 2003.), p. 9). The company acquired the antibiotic from Lilly in 1999 for an upfront payment of $90.5 mil., plus sales-based milestone payments (³ (Also see "King" - Pink Sheet, 9 Aug, 1999.), p. 31).

The firm does not expect any other "material" changes to its previously announced results.

King confirmed April 2 that it does not intend to proceed with the acquisition of Elan's primary care business, including the sleep aid Sonata and the muscle relaxant Skelaxin .

King does not intend to proceed with the acquisition as a result of "various breaches and misrepresentations" in the agreement, the firm said.

King announced in March that it was re-evaluating the deal in light of a Federal Trade Commission investigation into Elan's patent defense strategy for Skelaxin (⁴ (Also see "Tidbits From The SG Cowen Health Care Conference" - Pink Sheet, 31 Mar, 2003.), p. 30). Under the January agreement, King would pay $850 mil. for the products (⁵ (Also see "No Rest For Sonata: King To Develop XR Version After Acquisition From Elan" - Pink Sheet, 3 Feb, 2003.), p. 29).

Elan disputes King's assertion that the FTC inquiry materially affects the agreement; the Irish company has filed suit to force King to proceed with the agreement.

Past FTC actions involving brand-generic disputes have not involved financial penalties, although the agency has threatened that it would take tougher actions against firms that engage in similar behavior.

FTC cases are typically followed by litigation from purchasers that do seek monetary damages. That may be one factor in King's calculation about proceeding with the agreement.

The FTC action may also have forced King to re-examine its assumptions about the likely remaining exclusivity for Skelaxin. In announcing the deal, King said it assumed that the product would have 30 more months of exclusivity.

There are ANDAs pending for generic versions of Skelaxin (metaxalone), apparently blocked only by a method-of-use patent claiming use of the product administered with food. King may also be re-examining its assumptions for the Sonata franchise in light of the FTC investigation. Any settlement of the Skelaxin case would likely include restrictions on future patent defense strategies open to the company.

The Sonata patent expires in June, although Elan expects the product to receive a Waxman/Hatch extension until 2008. (Sonata is protected by new chemical entity exclusivity until 2004.)

King's strategy with Sonata was to pursue development of a modified-release version to complement the immediate-release product. The MR formulation has patent protection until 2018, but is not projected to reach the market until 2007.