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KV Pharma

KV Pharma is a pharma company that has been hitten hard because of a FDA compliance issue. In January 2009 the company recalled all its products due to FDA compliance issues. The compliance issues were related to a limited lots of drugs manufactured by the company, to be safe the company recalled all its products.

The recall is like a sand-clock. With no sales the company has to survive on its cash on hand until the company is able to sell its products again. The company’s balance sheet is strong, with cash on hand of about 160M and 70M in auction rate securities. The question is whether the company can start selling drugs before it runs out of cash.

The company’s market cap dropped from 1B to 32M. The current uncertainty creates a low-risk high-return opportunity. The company has been working with the FDA to correct the compliance issues and recently filed an announcement that shows the company is making strides in fixing the issue. The company also has enough liquidity and assets (patent on drugs, 1M square feet manufacturing facility) to help it make it through.

Once the company is in compliance with FDA requirements, the company can easily command a market cap around 600M. At the current prices, I see a 20X return in 1-2 years. If the company can’t avoid bankruptcy, I believe the liquidation of assets will not wipe out the equity investment completely.

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