The Health Care M&A Monthly: Alpharma Agrees To King’s Offer--

King Bids $1.6 Billion To Enhance Its Pain Franchise

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Despite turmoil in the credit markets, the big deal has not gone the way of the dinosaur. Just before Thanksgiving, King Pharmaceuticals (NYSE: KG) finally nailed down its $1.6 billion offer for Alpharma (NYSE: ALO) with the announcement that both companies’ boards had agreed to the acquisition. This strikes us as all the more remarkable since the initial bid was made way back in August before that fateful September day when Lehman Brothers was "allowed to fail," prompting the markets, valuations and investor confidence all to plunge. But King remained focused on the strategy to enhance its pain franchise, and went ahead with the deal.

Based in Bridgewater New Jersey, Alpharma develops, manufactures and markets pharmaceutical products for both humans and animals. Though its animal health products provide most of the company’s revenue, its branded pharmaceutical products for humans include the morphine painkiller Kadian and the Flector Patch, a nonsteroidal, anti-inflammatory patch. ALO’s animal health segment engages in the development, registration, manufacturing and marketing of medicated feed additives and water soluble therapeutics for cattle, poultry and swine. We need not linger over this segment except to note that its presence in the mix probably contributed to the relatively low acquisition multiple noted below. On a trailing 12-month basis, ALO generated revenue of $834.0 million, negative EBITDA of $18.0 million and a net loss of $64.0 million.

Headquartered in Bristol, Tennessee, King Pharmaceuticals provides a range of branded prescription pharmaceutical products, including those prescribed by primary care physicians, neurologists, orthopedic surgeons, hospitals, internal medicine physicians, allergists, pediatricians and, importantly, pain specialists. Its current portfolio of marketed painkillers includes Avinza for chronic pain and Skelaxin, a muscle relaxant. On a trailing 12-month basis, KG generated revenue of $1.8 billion, EBITDA of $654.0 million and net income of $258.0 million.

In 2007, sales of all the drugs in the pain franchise accounted for about 30% of company revenue while King’s hypertension drug Altace accounted for another 30% just by itself. But generic competitors to Altace started appearing on the market in December 2007, triggering a steep decline in revenue and underscoring the need to replace the revenue that would be lost going forward. Naturally, King had been aware of the looming loss of exclusivity and revenue for some time. To make up the difference and expand, the company decided to focus on its pain franchise. As early as 2005, it entered into a $400.0 million partnership with Pain Therapeutics (NASDAQ: PTIE) to develop Remoxy, a long-acting abuse-resistant form of the painkiller Oxycontin. In 2006, it acquired Avinza from Ligand Pharmaceuticals for $313.0 million to add to its arsenal of pain drugs. And in 2007, in a transaction worth $58.0 million, it partnered with Acura Pharmaceuticals (OTCBB: ACUR) to develop and commercialize a range of opiod analgesic products that make use of ACUR’s patented Aversion Technology platform.

What appears to have tempted King to make its recent offer is that Alpharma has been developing a tamper-proof morphine pill, Embeda, currently under review by the FDA. On August 22, King offered $33.00 per share, or $1.4 billion. Alpharma promptly responded by adopting a poison pill provision. Undeterred, King then raised its offer to $37.00 per share, or $1.6 billion, in October. Then in early November, an FDA advisory panel said that Embeda seemed to offer some advantages over existing medications. While the FDA isn’t bound to follow an advisory panel’s opinions, it often does; the panel’s announcement was thus tantamount to a green light for a new drug with a therapeutic advantage over other painkillers and many years of a secure revenue stream without competition. But why, with this positive signal from the FDA, would Alpharma choose to sell out? ALO needs King’s marketing and sales force to realize the revenue-generating potential of the new drug in the market. King is in a position to insert Embeda into its pain franchise more readily than ALO can, whose sales force is more at home selling to veterinarians than physicians. In addition to giving the drug a better chance of reaching its market potential, this deal relieves ALO of the need to hire new sales staff.

As it now stands, the deal offers ALO shareholders a 54% premium to the price of the stock on August 21, the last trading day before KG made its initial offer. The deal is valued at 1.9x revenue, a multiple significantly lower than a branded pharma focused solely on humans could command, say between 3.0x and 4.0x.

Credit Suisse and Wachovia Securities are providing King with financial advice; Banc of America Securities, LLC is providing Alpharma with similar advice.
 

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