Pfizer To Buy King Pharma For $3.6 Billion To Boost Pain Franchise

Pfizer's acquisition of King Pharmaceuticals will be the Big Pharma's first "bolt-on" purchase since its mega acquisition of Wyeth in 2009 and fits neatly into a strategy it articulated to a jittery Wall Street for months ("Pfizer & Wyeth: Is Mega Merger A Strategic Move Or Desperate Play?" "The Pink Sheet," Jan. 26, 2009.

Pfizer's acquisition of King Pharmaceuticals will be the Big Pharma's first "bolt-on" purchase since its mega acquisition of Wyeth in 2009 and fits neatly into a strategy it articulated to a jittery Wall Street for months ( (Also see "Pfizer & Wyeth: Is Mega Merger A Strategic Move Or Desperate Play?" - Pink Sheet, 26 Jan, 2009.).

The plan has to look for transactions valued at between a few to several billion dollars, which complement the company's core businesses and add incremental value (Also see "Pfizer's Focus Is On "Bolt-On" Acquisitions After Wyeth Merger" - Pink Sheet, 3 Aug, 2010.).

Pfizer announced on Oct. 12 that it plans to buy King for $3.6 billion in cash, a move that certainly fits its strategy. With revenues of $1.8 billion in 2009 King won't noticeably affect Pfizer's growth or financial prospects, but it will bulk up the pharma in a strategically important therapeutic area.

King will bring to Pfizer a narrow portfolio of specialized pain therapies, most of which are for acute and severe pain, and a well-trained specialty sales force. The commercial synergies are attractive, Group President of Pfizer Biopharmaceutical Businesses Ian Read told analysts on a same-day conference call.

Some of King's drugs can be dropped into the Big Pharma's primary care sales force bags to be promoted to general practitioners alongside Pfizer's Celebrex, he pointed out. Likewise, Celebrex and Lyrica, which Pfizer sells for mild to moderate pain, can benefit from the support of King's specialized sales force; currently Pfizer's detailing emphasis for them is on primary care doctors.

Both companies’ boards have agreed to the sale, with a goal of closing the transaction during the fourth quarter of 2010 or first quarter of 2011.

A leader in the specialty pain management market, King's portfolio centers on a handful of therapies it sells to specialists, including Embeda (morphine sulfate/naltrexone hydrochloride extended-release capsules), a long-acting Schedule II opioid agonist, which it launched in late 2009 and which is off to a disappointing start; Avinza, a once-daily morphine; and Flector Patch (diclofenac epolamine topical patch) (Also see "King Pharma's Second Quarter Disappoints; Looks to Pain Approvals and Diversification" - Pink Sheet, 9 Aug, 2010.).

In addition, the company is the leader in the abuse-resistant subsector of the pain market, which could reach $2 billion, as utilization shifts from traditional oxycodone, according to Cowen & Co. It already has one tamper-resistant drug on the market, Embeda, and has plans to re-file FDA submissions for two more of these drugs, Remoxy and Acurox, by year end and first-quarter 2011, respectively. Analysts consider Remoxy particularly promising; despite its rocky regulatory history, they expect it to gain FDA approval and eventually win attractive, if not blockbuster sales.

A Bargain For Pfizer, A Good Deal For King

Analysts reacted favorably to the deal, viewing it as a bargain for Pfizer, a good business fit, and a favorable, if somewhat less than optimal deal for King Pharma. The $3.3 billion price tag – after considering King's cash on hand – works out to $14.25 a share, or a 40% premium over the specialty pharma’s share price at closing on Oct. 11.

The price is 2.2 times sales, on par with the low end of the range of valuations Big Pharma recently paid for specialty pharmaceutical properties. In 2009, Dainippon Sumitomo bought Sepracor for $2.6 billion, or 2 times sales, and GlaxoSmithKline bought Reliant and Stiefel Laboratories for 4.9 and 2.4 times sales, respectively, for example.

But Bristol, Tenn.-based King has had a volatile history, and while Remoxy's chances of getting through FDA look promising, it still faces some uncertainty, which likely held down the valuation, analysts said. Pfizer, for its part, has done its due diligence on the product and is "comfortable with where we are and where we think this is on a going forward basis," CFO Frank D'Amelio told analysts on the conference call.

A pioneer in the specialty pharma business model, King has struggled to grow throughout much of the last decade as its key drugs – namely the hypertensive Altace and the muscle relaxant Skelaxin – lost exclusivity. As a specialty pharma company, King lacked internal R&D and instead relied entirely on in-licensing and acquisitions to feed its development pipeline.

But that strategy fizzled – as it has for the entire specialty pharmaceutical sub-sector. King became a victim of its own success, as imitators increased the competitive landscape, leading to a decline in opportunities to buy solid, fairly valued late-stage assets ("Can An Overthrown King Help Mylan?" IN VIVO, Sept. 2004). King managed in Dec. 2008 to win control of Alpharma, a pain medication company, which enabled it to shift its therapeutic focus.

Pain, while lucrative, has proven to be a tough market, however, with ever-higher regulatory hurdles and little innovation outside of abuse deterrence. In 2009, King's revenues were roughly 10% lower than they had been in 2006, and its sales force was nearly half the size. It reported a weak profit of $92 million, compared to the stellar results of $285 million in 2006.

Nevertheless, King now brings Alpharma's pain franchise to Pfizer, along with a 500-member specialty sales force, which Pfizer said it plans to maintain.

During the same-day investor call, D'Amelio said the company perceives at least $200 million of cost savings from deal synergies. In addition, Pfizer sees commercial benefits as it adds Lyrica and Celebrex to the basket of products King markets to specialists and drops some of King's products (namely the Flector patch and Avinza) into Pfizer's primary care sales force, thereby expanding sales more than either company could on its own.

In pain, Pfizer will compete primarily against two more focused, albeit much smaller companies, Endo Pharmaceuticals and Purdue Pharma. While the Big Pharma is best known for its prowess in large primary care markets, however, it has been successful in at least one other niche specialty area, ophthalmology, where for many years its prostaglandin for glaucoma, Xalatan, dominated the market against specialty companies, pointed out Cowen's Ian Sanderson.

King's aggressive foray into abuse-deterrent opioids also could put Pfizer in an attractive position as controversy over regulatory requirements and the effectiveness of these drugs gets resolved. A joint FDA advisory committee meeting on the topic is scheduled for Oct. 21 and 22 and will consider, among other examples, the design of post-marketing studies for Embeda and Purdue's Oxycontin (oxycodone hydrochloride controlled release), which should shed some light on the issue.

Strategic Business Fit With King

While pain medication is by far its largest revenue generator, King also has smaller medical device and animal health businesses, which Pfizer will absorb into its various business units. In particular, King has the Meridian auto-injector drug delivery business ($252 million in 2009 revenues), which includes the Epi-Pen device and which contracts with the U.S. Department of Defense, along with a small animal products division ($359 million in revenues in 2009). D'Amelio, responding to an analyst's question, said the company doesn't plan to expand in the medical device business.

Industry analysts noted that the deal is immediately accretive to Pfizer’s bottom line, although its impact on the overall business will be marginal. Pfizer projected the deal would be accretive to earnings per share by $0.02 in 2011 and 2012 and by $0.03 to $0.04 annually from 2013 through 2015.

Cost Savings May Be Underestimated

Analysts also believe that Pfizer is underestimating the cost synergies it will achieve from the deal. King spending on SG&A and R&D would likely total $685 million in 2011, which Pfizer could cut considerably, UBS analyst Marc Goodman estimated.

In an interview, Goodman projected the cost savings at $300 million and said even that estimate probably was conservative. He predicts accretion of $0.03 in 2011, $0.05 in 2012 and $0.07 in 2013, with Pfizer likely to improve on King’s sales performance, meaning the 2013 performance should be even stronger.

Analyst Irina Rivkind of Duncan-Williams, Inc., meanwhile, projects sales growth for Embeda and strong sales potential for Remoxy (long-acting oxycodone), which remains stalled in development due to a December 2008 “complete response” letter from FDA seeking more substantial proof of the formulation’s abuse-deterrent capabilities (Also see "Now Who Needs a Painkiller? King and Pain Therapeutics Face a Remoxy Setback" - Pink Sheet, 7 Jul, 2009.).

Rivkind projects Embeda will end this year with $62 million in sales but with those sales then increasing by a double-digit pace from 2011 through 2015 and reaching $470.2 million in 2020. For Remoxy, she predicts a launch in 2012 with sales reaching $328.2 million in 2015 and continuing to grow, with a peak of $497.2 million in 2020. Those estimates do not factor in the marketing muscle Pfizer could put behind those products, she added.

While those products may seem like small fish for Pfizer, the pharma is eager to add to its portfolio in pain, especially after the clinical setbacks it has experienced with anti-nerve growth factor candidate tanezumab, which had reached Phase III in osteoarthritis. This summer, Pfizer halted several Phase II and Phase III trials of the antibody at FDA’s request due to adverse effects seen in osteoarthritis patients – the company says it will continue to investigate the compound in cancer and pancreatitis (Also see "No Relief For Pfizer As It Shuts Down Additional Tanezumab Trials" - Pink Sheet, 20 Jul, 2010.).

One factor Pfizer apparently does not have to worry about is a potential competing bid for King. While analysts thought the emergence of another suitor was unlikely anyway, an SEC filing clarified that Pfizer would be due a $110 million breakup fee if the deal failed to go through. An agreement with Pfizer also prohibits King from seeking or accepting third-party bids.

Regardless, it’s hard to imagine another ideally positioned suitor for King, Rivkind said. The fit between Pfizer and King is very precise and not many companies have nearly $4 billion to kick around at the moment, either, she added.

By Wendy Diller, Joseph Haas