King To Discuss $46.5 Mil. In Medicaid Underpayments With HHS, DoJ

King plans to discuss its Medicaid rebate reporting with HHS and DoJ after acknowledging an estimated $46.5 mil. in underpayments between 1998 and 2002.

"We initiated contact with the Centers for Medicare & Medicaid Services, the Office of Inspector General at [HHS], and the Department of Justice in connection with the underpayments," President Kyle Macione said on a conference call with securities analysts July 29.

The company expects "to engage in more detailed discussions with these and other appropriate agencies in order to determine the precise amount of the underpayments," he said.

King expects to reimburse the government for the underpayment in the third or fourth quarter. "Pending determination of the precise amount of such payments, King has placed $46.5 mil. of its cash on hand in an interest-bearing escrow account."

The company also recorded an adjustment of $46.5 mil. to total revenues and accrued expenses in the fourth quarter of 2002. The adjustment represents 1.4% of King's total revenues from 1998 to 2002. The amount does not include any interest, fines or penalties resulting from a government investigation.

King received a subpoena from the Securities & Exchange Commission in March requesting information about Medicaid rebate accounting and subsequently discovered errors in its Medicaid rebate accounting (¹ (Also see "King Acknowledges Medicaid Accounting Errors; Wants Out Of Elan Deal" - Pink Sheet, 7 Apr, 2003.), p. 35).

In light of the SEC investigation, King delayed filing its 2002 Form 10-K and Form 10-Q for the first quarter of 2003. King's management also recommended an internal review by the board's audit committee.

The internal review was completed on July 28; however, the SEC investigation of King is continuing.

The committee concluded that "the underpayments requiring the accrual adjustment did not arise from an effort on the part of the company's current or prior management to mislead investigators by manipulating reported financial results," Macione said.

However, "the company needs to dedicate additional attention and resources to ensure compliance with all applicable reporting requirements for Medicaid rebates and other governmental pricing programs."

King is implementing a new information technology system and is working with consultants while it expands its internal compliance staff.

"We have engaged outside consultants to ensure that the new information technology system enhances the accuracy of our calculations for estimating amounts due under Medicaid and other governmental pricing programs," Macione said.

"In addition, we have hired a senior director knowledgeable with respect to Medicaid and other governmental pricing programs. We are continuing to search for and hire qualified personnel."

In addition to the Medicaid underpayments, two other adjustments were made to King's financial results as a result of the internal review.

King will take a $39.8 mil. charge relating to purchase commitments for the antibiotic Lorabid in excess of demand. King acquired Lorabid from Lilly in 1999, but sales are falling well below purchase commitments included in the Lilly agreement, King said.

"Due to the further decline in King's revenue projections for Lorabid as of July 2003, King was also required to reassess the fair value of the Lorabid intangible assets," the company said. King determined that the asset impairment charge of $76.8 mil. recorded for 2002 should be decreased to $66.8 mil.

The company announced plans to divest Lorabid in January, but has not been able to find a buyer (² (Also see "King Buys Aventis’ Synercid, Tilade, Intal; Will Add 85 Reps To Sales Force" - Pink Sheet, 6 Jan, 2003.), p. 9).

King will also defer $4.7 mil. of revenue associated with the purchase of Cortisporin , Silvadene and Tigan by the King Benevolent Fund from a third-party wholesaler. As of July 15, the Benevolent Fund had yet to distribute 77% of the Cortisporin, 59% of the Silvadene and 11% of the Tigan purchased in January.

Family members and associates of King CEO Jefferson Gregory manage the Benevolent Fund. Since a majority of the products had not been distributed after six months, the fund might be deemed a "related party" for accounting purposes at the time of the sale.