King Pharma: A Value Play on New Drug Approvals

Thursday, 19 March 2009 11:07

King Pharma (KG) is a specialty pharmaceutical company which recently acquired Alpharma for $1.6B and has three pending NDAs at the FDA for new drug approvals and received a complete response late last year for Remoxy (an abuse deterrent form of extended-release oxycodone) along with Pain Therapeutics (PTIE).

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King is currently trading at around decade lows in terms of stock price at a market cap of $1.7B and enterprise value of $2.2B. Consensus analyst estimates for 2009 revenue are about $1.8B with expected EPS of $0.67, yielding a forward PE of just over 10X and price/sales ratio of about 1X.

The Alpharma acquisition diversifies King's revenue base thanks to over $350M in annual revenue from animal health (feed additives) and over $125M in sales for pain patch Flector. King is expected to face generic competition for its top-selling muscle relaxant drug Skelaxin (nearly $450M in sales during 2008) later this year after two patents were recently invalidated for the product. Expected cost saving synergies from the merger are $60M. While sales of King's existing product line-up are expected to be under pressure during 2009, new drug approvals are key to restore growth and resurrect the sagging share price. Embeda (a long-acting form of morphine with an embedded naltrexone core to deter abuse/misuse) was acquired along with Alpharma and a decision by the FDA is still pending beyond the original PDUFA date.

Recently, King and Acura Pharma's (ACUR) NDA for another abuse-deterrent opiate pain killer Acurox (immediate release oxycodone and niacin) was accepted by the FDA with a priority (six-month) review designation with a PDUFA date of 6/30/09. Later in the year, King has a PDUFA date of 10/18/09 for CorVue as a pharmacological stress imaging agent for the heart.

King's late-stage, Phase 3 pipeline includes a gel formulation of ketoprofen as a topical non-steroidal anti-inflammatory drug (NSAID) and Vanquix as an auto-injector formulation of diazepam (Valium). The Company is also developing other abuse-deterrent and topical formulations of pain drugs and local anesthetics, including Eladur (bupivacaine patch), oxycodone NT, and hydrocodone NT.

For 2009, King forecasts cash flow from operations of $375-400M, gross margin of 68%, and total R&D spending of $100-110M (excluding milestone payments to partners). King expects to meet with the FDA during 2Q09 to clarify the non-clinical information required to address the complete response letter from late last year.

With a sales force that includes over 600 agents targeting primary care physicians and pain specialists in addition to over 100 agents targeting hospitals; King has the potential for three new product approvals this year (Embeda, Acurox, and CorVue) along with clarity next quarter on the status and timeline for Remoxy approval. The Alpharma acquisition expands and diversifies the revenue base and provides a potential near-term catalyst in the form of Embeda approval.

Earlier this year, the FDA issued a statement directed at drug makers which market the strongest types of painkillers - classified as opiates, narcotics, and DEA Class 2 Controlled Substances. The FDA wants pain drug makers to play a larger role in stemming abuse and diversion issues amidst concern about the rising incidence of overdose deaths, abuse, misuse, and diversion associated with opiates such as Duragesic (fentanyl patches), OxyContin, and similar drugs.

Approval of Embeda would represent the first approval of an opiate pain drug designed to deter abuse and misuse, which is consistent with the new guidelines issued by the agency. Also, the acceptance of the Acurox NDA with a priority review designation gives King a chance at two abuse-deterrent opiate pain drug approvals by mid-year to fulfill an unmet medical need that the FDA has acknowledged in its new stance toward narcotic pain drugs.

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