Drug maker Pfizer Inc. (PFE) agreed to buy King Pharmaceuticals Inc. (KG) for $3.6 billion in cash, a deal that could modestly soften the blow of next year's expected loss of market exclusivity for Pfizer's blockbuster cholesterol drug Lipitor.
The proposed acquisition, which at $14.25 a King share represents a 40% premium to Monday's closing price, will expand Pfizer's painkiller and animal-health businesses while also presenting an opportunity for cost savings.
King shares rose 39.5% Tuesday to $14.16 while Pfizer was up 2 cents at $17.40.
The announcement comes nearly a year after Pfizer, the biggest drug maker in the world by sales, acquired Wyeth for $68 billion. The Wyeth deal significantly diversified Pfizer's business and generated cost savings, but Pfizer executives subsequently said they would pursue additional, smaller deals to meet financial targets for 2012. Pfizer reiterated its 2012 targets in announcing the King deal.
Pfizer also has continued to experience drug-research setbacks since closing the Wyeth deal, which has made the task of offsetting impending patent expirations for Lipitor and other big-selling drugs more difficult.
"We believe the transaction is attractive to shareholders," Pfizer Chief Financial Officer Frank D'Amelio said on a conference call with analysts Tuesday.
It's the latest example of large pharmaceutical companies buying smaller biotechnology or specialty-drug makers, moves designed to offset patent expirations and improve drug-research productivity. Pfizer rival Sanofi-Aventis SA (SNY, SAN.FR) is currently pursuing Genzyme Corp. (GENZ), maker of drugs for rare diseases, with a hostile bid of $18.5 billion on the table.
Although Pfizer is buying King at a premium to its recent stock price, King shares through Monday were down 17% this year as U.S. regulators declined to approve abuse-resistant pain killer Acurox in April and sales of another pain drug, Skelaxin, have sharply declined because of generic-drug competition.
But Pfizer touted other King pain products including the Flector Patch and the recently launched Embeda, which is the first approved opioid designed to discourage misuse and abuse. King also brings drug-injector products and animal-health products to Pfizer.
Pfizer executives said the deal would allow its sales force to promote both King pain products and Pfizer pain products including Lyrica and Celebrex.
In buying a drug company with more traditional pharmaceutical products, Pfizer may get more immediate benefits including cost savings than if it had picked up a biotechnology company that makes drugs derived from living cells, which generally command higher prices and are less vulnerable to generic competition. But a biotech company might have brought Pfizer more long-term revenue and earnings potential, with less exposure to generic competition.
Bernstein analyst Tim Anderson wrote in a note to clients that the King business probably doesn't have "tremendous growth" ahead of it. Still, he said the King deal shows that Pfizer will probably continue to expand into new areas including branded prescription drugs, emerging markets or consumer health.
Standard & Poor's analyst Herman Saftlas said the King deal was a "good strategic fit" with Pfizer, and he expects Pfizer to do similar deals to offset its patent losses.
Pfizer expects the King deal to add about 2 cents a share to its adjusted earnings, excluding certain items, in 2011 and 2012, and to add 3 cents to 4 cents a share annually from 2013 through 2015. The companies expect to close the deal by early 2011, subject to regulatory approvals and other closing conditions.
Pfizer estimated it could generate savings of at least $200 million annually by the end of 2013.
The savings and expected earnings accretion from the King deal will only modestly offset the loss of exclusivity for Lipitor and other drugs in coming years. Leerink Swann has predicted sales of Lipitor alone will plunge to about $4 billion in 2013 from an estimated $10.7 billion this year due to generic competition.
-By Peter Loftus, Dow Jones Newswires; +1-215-656-8289;
(Nathan Becker and Thomas Gryta contributed to this article.)
SOURCE: The Wall Street Journal/Dow Jones Newswires