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KV Pharmaceuticals Whacked Twice

CLAYTON, Mo. (CN) - K-V Pharmaceutical produced adulterated and mislabeled drugs, causing the plant to be shut down and criminal charges against the company, according to a shareholder derivative complaint. The lawsuit also accuses a company director of inside trading. In a second complaint, a man claims his mother died from an overdose of a mislabeled KV drug.

The FDA put a hold on KV's inventory in 2008, freezing unapproved products containing Guaifenesin, worth approximately $39 million, according to the complaint in St. Louis County Court. The same year, KV received complaints about oversized morphine tablets, which led to further recalls, shareholder Thomas Henry claims.

"The filing also announced KV's net loss of $3 million, or $0.06 per share, for the second fiscal quarter of 2009 compared to the net income of $40.2 million, or a $0.70 per share gain, for the third quarter in the prior year," according to the complaint.

"The direct cause of two-third of this loss was the result of the recall of Guaifenesin and other related products because the individual defendants failed to properly oversee the regulatory and manufacturing" of KV's products.

Henry says KV announced that it had voluntarily suspended all shipments of FDA-approved drugs in tablet form on Dec. 23, 2008. The move eliminated $159 million, more than one-fourth of the company's revenue, the complaint states.

The United States sued KV in Federal Court in March 2009, seeking a permanent injunction prohibiting KV and its officers from manufacturing, processing or distributing any drugs. Prosecutors claimed KV sold adulterated, unapproved and misbranded drugs.

"The U.S.A. complaint contains allegations that demonstrate that KV and the individual defendants knew or recklessly disregarded that the company systematically deviated and even 'violated' CGMP [Current Good Manufacturing Practice]," the complaint states.

"Since at least 2003, the individual defendants continuously and unabashedly deviated from FDA regulations and CGMP that led to significant damages that harmed the company. The deviations from FDA regulations and CGMP have resulted in the complete shutdown of the company's manufacturing activities for over an entire year."

Henry's suit names 11 individual KV officers as defendants, including Marc Hermelin and David Hermelin, who control 62.2 percent of the voting power of KV. Victor Hermelin founded KV in 1942.

Henry claims that KV officers falsified financial documents to prop up the company's stock price.

"This wrongful conduct also devastated KV's credibility as reflected by the company's $1.5 billion market capitalization loss, or approximately 98 percent, from the company's market capitalization of $1.53 billion on Jan. 26, 2009, when the company suspended all manufacturing. Additionally, KV was also the subject of several shareholder class action lawsuits alleging securities laws violations in connection with improper financial reporting. The company faced substantial costs in connection with these lawsuits."

Henry claims Marc Hermelin participated in insider sales, selling 175,781 shares for a profit of more than $42 million, based on adverse information that was not disclosed to shareholders.

"Defendant M. Hermelin's sales were timed to maximize profit from KV's then artificially inflated stock price," the complaint states. "After the corrective disclosure regarding KV's suspension of the manufacture and shipment of all its products, the company's Class A common stock price declined to $0.51 on Jan. 26, 2009."

Henry seeks damages and reformation of KV's leadership and procedures. He is represented by James Rosemergy of Carey, Danis & Lowe in St. Louis.

In an unrelated complaint, KV was hit with a wrongful death action in the same court on the same day.

Frederick Samuel sued on behalf of his late mother, Virginia Samuel, who died allegedly due to a morphine overdose after taking KV's mislabeled tablets.

Samuel seeks punitive damages. He is represented by Michael Kruse with Onder, Shelton, O'Leary in St. Louis.

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