In our 7/15/13 email we discussed the K-V Pharmaceuticals (OOTC:KVPHQ) Chapter 11 bankruptcy case.  Specifically, we questioned why shares have been strong in recent trading sessions.  SEC filings clearly state that if the company emerges from Chapter 11 under the proposed reorganization plan that ownership interest of shareholders who own the current stock will be cancelled and new stock will be issued to a group of investors.  This investment group includes Deutsche Bank Securities, who will in total provide $275 million in financing.  After further due diligence, prompted by a correspondence with one of our premium members, we now know why some investors are making a speculative bullish play on the stock.  While we continue to perform more research, here is a brief snapshot of the bullish view on this topic.  Apparently, a major reason contributing to K-V Pharmaceutical filing for Chapter 11 was the result of competition from pharmaceutical compounders who are manufacturing medication that competes with one of KVPHQ’s drugs, Makena®.  As described on its website:

“Makena is a prescription hormone medicine (Progestin) used to lower the risk of preterm birth in women who are pregnant with one baby and who have delivered one baby too early (preterm) in the past. Makena was shown to work based on a lower number of women who delivered babies at less than 37 weeks of pregnancy.”

The price point of the pharmaceutical compound product was/is significantly less than KVPHQ’s, which greatly hinders the company’s ability to capture enough market-share in order to generate enough cash flow to service its debt obligation.

A bill to increase regulation of pharmaceutical compounders is scheduled to be voted on by the Senate in the next couple of weeks.  The name of the bill is S.959 — Pharmaceutical Compounding Quality and Accountability Act.  If the Senate passes the proposal, the bill will then travel to the House for approval.  If this bill is ultimately ratified it would likely eliminate/curtail competition for Makena®, allowing K-V Pharmaceutical to capture significant market share (possibly, close to a “monopolistic” position).

Such a scenario would obviously be a huge positive for K-V and would likely put the company in a better position to service its debt obligations.  Thus, the bullish view from current equity investors would contend that a Chapter 11 reorganization plan could be constructed to preserve the equity interest of the common shareholders.  If equity investors would be able to succeed in bringing a new plan to the table that is eventually approved by the court, K-V’s shares would likely be worth considerably more than they are today.  Those who support this bullish view are treating this investment as a “call” option with significant upside.

The challenge for the “bulls” will be that the events required to help their case need to happen rather quickly.  Any new plan proposed by an “equity committee” will likely face severe opposition from the players who are slated to receive new shares under the current plan.  They no doubt realize that K-V’s fortunes could soon turn decisively positive and that the stock issued to them could result in a windfall investment.  Furthermore, the FDA has tested compounds (compounded hydroxyprogesterone) that compete with Makena and did not highlight any major safety concerns.

“Although the analysis of this limited sample of compounded hydroxyprogesterone caproate products and APIs (Active Pharmaceutical Ingredients) did not identify any major safety problems, approved drug products, such as Makena, provide a greater assurance of safety and effectiveness than do compounded products”

This new information adds a significant element of risk to the short thesis— especially if the Senate passes the proposed bill and the story becomes more known.  In light of our findings, we are covering our short position in KVPHQ and are considering taking a risky bullish bet if developments warrant such a move.  We will continue to monitor the story for positive or negative developments related to the bullish or short thesis.

Disclosure: Covering short positions in KVPHQ; Considering Risky Bullish Bet.

K-V Pharmaceuticals Investor Relations Contact

Brad Edwards
edwards@braincomm.com
Brainerd Communicators, Inc.
1370 Broadway
New York, NY 10018
212-986-6667
www.braincomm.com

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