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Author: LiveFromHopkins Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253  
Subject: Re: New buying op Date: 11/17/2003 12:32 PM
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The 10Q is not all that bad IMO.

3Q03 vs 3Q02 shows 35% total revenue increase. And 25% increase of Net Income (after everything). Cash flow from operations continues to increase nicely. (9 months 2003 is $368M vs $325M 9 months 02.

The Elan purchase should have a pretty huge effect on sales going forward as the 2002 sales of the Elan products (Sonata, Skelaxin) amounted to $238 million. A big charge they took on the Elan purchase was Research in progress amounting to $193M.

KG is not a big research (viz. expensive) company. R&D amounted to 2% of sales in 3Q03. Their stated emphasis (see 3Q03 conf call) is to acquire other properties (drugs) and drive growth that way.

I view their diversified drug portfolio a plus. The more SKUs you have selling the less likely one drop in a line is going to affect your total business. (Ditto with stock portfolios, no?)

Pros:

Big margins, excellent growth.
Demographics - increasing drug consumption (geezers)
No 'big pharma' R&D overhead.
Strong, invested, growth-oriented leadership.
Increased sales team from Elan purchase.

Cons:

Continuing SEC, et al. investigation into Medicaid rebates.
General uncertainty re Medicare program government proposals.
Lack of visibility of inventory flow (conf call).
80% Institutional ownership.

Summary: if you stand back and look at what this young growth company has done and is doing now I think you will find excellent value. It is trading at a pretty low price for what it has achieved. If management keeps its eye on the ball, and government doesn't totally muck up the industry, this should be a superlative 3-5+ year holding.

Phil [long KG]




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