The pharmaceutical industry continues to be in acquisition mode with pharma giant Pfizer (PFE) announcing its intention to acquire King Pharmaceuticals (KG) for $3.6 billion. Pfizer and King Pharma have entered into a definitive merger agreement whereby Pfizer will acquire King Pharma for $14.25 per share.
Offer Price Represents 40% Premium
The offer price represents a 40% premium on King Pharma’s closing price as on Oct 11, 2010. The Boards of both companies have approved the deal, which is expected to boost Pfizer’s 2011 and 2012 earnings by 2 cents annually. The company expects 2013 – 2015 earnings to be boosted by 3-4 cents annually. Pfizer also expects to achieve cost savings of at least $200 million by late 2013.
2010 Guidance Remains Unchanged
Pfizer maintained its guidance for 2010: the company expects earnings towards the higher end of $2.10 – $2.20 on revenues of $67 – $69 billion. The 2010 Zacks Consensus earnings estimate currently stands at $2.21.
Pain Management Portfolio Main Focus
With several of King Pharma’s products facing slowing prescription trends mainly due to generic competition, we believe that Pfizer’s main attraction is towards King Pharma’s pain management portfolio. With this acquisition, Pfizer is looking to strengthen its position in the pain management market, which represents a significant commercial opportunity. The addition of King Pharma’s pain products will diversify Pfizer’s product portfolio and bring in additional sources of revenue.
Pfizer’s main pain management products include Lyrica and Celebrex. King Pharma’s lead pain management products include Embeda, Flector Patch, and Avinza. While Flector Patch and Avinza are yet to gain traction in the pain management market, Embeda represents significant potential.
Embeda has been designed to discourage misuse or abuse usually associated with the use of opioids. Besides Embeda, King Pharma is working on gaining approval for another abuse-deterrent opioid, Remoxy, which is being developed in collaboration with Durect Corp. (DRRX) and Pain Therapeutics (PTIE).
Remoxy, which failed to gain first-round US Food and Drug Administration (FDA) approval, will be re-submitted for review in the fourth quarter of 2010. We believe that Remoxy will eventually receive approval given the need for abuse-deterrent products in the pain market.
King Pharma also has an agreement with Acura Pharmaceuticals (ACUR) for the licensing, development, and commercialization of immediate release (IR) pain medicines utilizing Acura’s Aversion (abuse-deterrent) technology. Products being developed under this agreement include Acurox, Vycavert and Acuracet.
In addition to gaining access to King Pharma’s pain management portfolio, Pfizer will also benefit from the addition of King Pharma’s EpiPen business and Animal Health business which should complement Pfizer’s Animal Health segment.
Both Companies No Stranger to Acquisitions
Both Pfizer and King Pharma are no strangers to acquisitions. King Pharma, which primarily focuses on specialty markets, particularly specialty-driven branded prescription pharmaceutical markets, acquired specialty pharmaceutical company Alpharma, Inc. in December 2008. Several years back in 2004, King Pharma had entered into an acquisition agreement with generic player Mylan Inc. (MYL). However, the deal was subsequently scrapped.
Meanwhile, Pfizer pulled off one of the biggest deals in the pharma sector in recent times with its $68 billion acquisition of Wyeth.
Deal to Close in Late 2010/Early 2011
The acquisition is slated to close in late 2010 or early 2011, depending on the tender process and regulatory clearances. Pfizer intends to commence a cash tender offer immediately. We currently have Neutral recommendations on both Pfizer and King Pharma.
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