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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?)


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.


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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