M&A Frenzy Stays Hot With Pfizer's $3.6 Billion Deal for King Pharmaceuticals

The frenzy of activity in mergers and acquisitions (M&A) continued yesterday (Tuesday), when Pfizer Inc. (NYSE: PFE) agreed to pay $3.6 billion in cash to buy King Pharmaceuticals Inc. (NYSE: KG).

Pfizer, the world's largest drugmaker, is paying $14.25 per share for King. That's a premium of 40% to the stock's Monday closing price of $10.15. As part of the deal, Pfizer will receive such products as Avinza and EpiPen, a pre-filled injection designed to quickly treat serious allergic reactions.

King also gives Pfizer access to the Flector pain patch and morphine pill Embeda. Pfizer has been looking to expand its pain products beyond the arthritis treatment Celebrex and nerve pain remedy Lyrica. King had $1.78 billion in revenue last year and is focused on making pain medications that patients can't abuse.

Pfizer needs new products to help offset revenue losses expected next year when generic copies of its top-selling drug, the Lipitor cholesterol pill, enter the market. Lipitor sales topped $11.4 billion last year.

"We view King as a solid asset at a somewhat elevated price for Pfizer," Joel Levington, managing director with Brookfield Investment Management Inc., said in an email to Bloomberg News. "The transaction should modestly help Pfizer's growth profile in 2012 through 2013, and we do not see the deal having an impact on the company's strong creditworthiness."

The deal comes a year after Pfizer bought Wyeth for $68 billion - a deal that kicked off a flurry of merger activity in the pharmaceutical industry. Big drug makers face the expiration of patents on many flagship drugs, which opens the doors for much cheaper generic versions of those drugs to enter the market.

Fitch Ratings Inc. cut its outlook on Pfizer to negative earlier this month, saying the effects that expiring patents will have on revenue and margins will likely be worse than expected. But Pfizer's stock has rallied lately, as the Wyeth acquisition boosted revenue.

With the deal, Pfizer expects to increase its exposure to the pain medication market, a business that is expected to grow as baby boomers hit retirement age.

"We are highly impressed by King's innovative products and technology in the pain relief disease area, as well as by its success in advancing promising compounds in its pipeline," said Jeffrey Kindler, Pfizer's chief executive. "The combination of our respective portfolios in this area of unmet medical need is highly complementary and will allow us to offer a fuller spectrum of treatments for patients across the globe who are in need of pain relief and management."

Global mergers and acquisitions activity is at its highest level since late 2009, providing a glimmer of hope to investors struggling to decipher stock and bond markets roiled by a weakening U.S. economy.

Global takeovers announced so far this year have totaled $1.29 trillion, up 23% from the same time last year, according to Bloomberg.

The value of worldwide M&A totaled $1.75 trillion during the first nine months of 2010, a 21% increase from comparable 2009 levels and the strongest nine month period for M&A since 2008, according to Thomson Reuters.

The pharmaceutical business has been particularly active this year.  Last week, France's Sanofi-Aventis (NYSE ADR: SNY) launched an $18.5 billion hostile bid for Massachusetts-based Genzyme Corp. (Nasdaq: GENZ), offering $69 per share directly to investors, raising pressure on the U.S. biotech to start negotiations.

That followed U.S. drugmaker Johnson & Johnson's (NYSE: JNJ) plan to buy the rest it doesn't already own of Leiden, Netherlands-based vaccine manufacturer Crucell NV for $2.4 billion.

Stock market investors usually cheer the deals because acquisitions are seen as a sign companies are confident the economy will grow and business will improve

"Increased M&A activity is giving decent support to equities in a fairly illiquid market," Jeffrey Davis, who oversees $5 billion as chief investment officer at Lee Munder Capital Group in Boston told Bloomberg. "We're looking at growth stocks and technology stocks in particular which have taken a beating over the past weeks, so there may be some attractive valuations there."

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