Tuesday, June 19, 2012

KV Pharma ($KV-A) Bonds Trade at New Low

The KV Pharma 2.500% note due 05/16/2033 (which is putable next year) traded today at 13.75! That is a market value for that whole $200 million note issue of $27.5 million. (Which implies that the noteholders will lose $172.5 million.) Meanwhile, the company has a market cap of roughly $43 million (across the A and B shares).

I wonder whether the company is using the proceeds from their equity offerings to buy back bonds? For the $20 million size of the buyback facility, they could buy back $145 million of the $200 million face amount of notes, assuming current prices. That would help them out a lot!

Another possibility would be to offer, say, 600 million shares to the owners of the notes in an exchange offer. That would result in the current equity being diluted down to roughly 10 percent ownership. However, with the stock and bond prices where they are, how else can the company get out of this jam?

I'm not sure why they didn't do this when the share price was higher (before the FDA announcement). Maybe they were gambling on an FDA decision that would be better for their business?

The International Academy of Compounding Pharmacists (IACP) released a statement about the FDA press release. The IACP CEO David G. Miller said,

"Despite attempts by a manufacturer, KV Pharmaceutical, intent on maximizing its profits by casting doubts on the quality and commitment of compounding pharmacists, the FDA's own independent review confirmed that there were no safety issues with compounded 17-P. Since the introduction of KV Pharmaceutical's Makena(R) hydroxyprogesterone caproate injection at $1,500 per dose, and despite KV's cease and desist letters to pharmacists claiming that hydroxyprogesterone caproate/17-P could no longer be compounded now that there was an FDA-approved product, IACP and its Members have steadfastly affirmed that 17-P should still be able to be compounded for patients as it has been done for the past 20 years[...]

There are many reasons why a prescriber would choose a compounded alternative over the FDA-approved product – dosage strengths, patient intolerance to excipients, dosing forms, compliance issues, taste, allergies, a continued course of previously initiated therapy – to name just a few. If a prescriber determines that a compounded preparation of a medication is in the best interest of his or her patient and discusses the available options with a pharmacist, there are no statutory or regulatory prohibitions on that professional decision.

Patients and prescribers should feel confidence in knowing that compounding pharmacies follow rigorous processes and steps to provide finished preparations that are as sterile and potent as those of a manufacturer."
This is so bearish for KV. Esitmates of enterprise value for KV Pharma require a large valuation for Makena in order for the equity and even sub notes to have any value. That was predicated on having a monopoly on 17p which it now looks like will never happen. It's generally better not to be too greedy, even if you think you have the ace in the hole or a "monopoly". When your opponent is cornered they have a huge incentive to aggressively find a way out.

Trying to prevent pharmacists from compounding was a mistake because it would have created a very unfavorable precedent for pharmacists. With their professional backs to the wall, the pharmacists fought really hard and appear to have won.

At this point, I'm not sure why the company would wait to begin restructuring/deleveraging. If the bondholders think that their $200 million claim is only worth $27.5 million, and the equity market thinks that the equity is worth $43 million, then the obvious choice is to swap debt for equity.

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