A Compelling Case for King Pharma

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From Standard & Poor's Equity Research

Generic Threats

The company also initiated a comprehensive business strategy, which we believe has realigned its organization and positioned it for growth in the years ahead. A key element of this strategy is focusing on core competencies in three therapeutic categories: cardiovascular/metabolic, neuroscience, and hospital/acute care.

While generic threats to principal Skelaxin and Altace drugs have increased, we believe the company is taking the appropriate steps to hold these challengers at bay for several years. With respect to Skelaxin, we think King's planned filing of an amended citizen's petition with the FDA to block generics now stands a good chance of being upheld, given the FDA branded division's approval of a new Skelaxin label in December, 2006. The new label includes more specific warnings for patients taking the drug with food, based on new clinical pharmacology studies presented by King.

Although the FDA's generic division decided in 2004 that warnings over the food effects could be removed from generic labels (making it easier for generics to launch "at risk," before resolution of ongoing patent litigation with King), we think the FDA may be more reluctant to approve such a carve-out now, thereby reducing the likelihood of a generic launch "at risk." We believe generics will be blocked at least until 2009.

Strategic Partnerships

King is also taking steps aimed at protecting its important Altace and Thrombin-JMI franchises. Specifically, the company has developed an Altace/diuretic combination, which it plans to file with the FDA during the second half of this year. It has also developed new formulations of Altace through collaboration with Arrow International (ARRO). Similar line expansions are planned for the Thrombin-JMI line.

We think these and other life cycle management strategies should enable King to salvage a good portion of its Altace and Thrombin-JMI sales when generics and other competition hits over the coming years. In addition, the company recently formed a partnership with Depomed (DEPO) to market Glumetza, a once-daily extended-release version of metformin for the treatment of type-2 diabetes.

King is also moving aggressively to become a leader in pain management. Building on its existing Skelaxin muscle pain franchise, the company has agreed to acquire Avinza, a once-daily treatment for chronic pain that contains morphine in an extended release form. We see significant potential for this product, which is being directed to a $7 billion opiate market that serves over 50 million Americans affected by chronic pain.

Narrower Margins

Looking for representation in the huge potential market for abuse-deterrent opiates, the company acquired worldwide commercial rights to Pain Therapeutics' (PTIE) Remoxy abuse-resistant oxycodone painkiller in 2005. Results from a pivotal Phase III clinical trial on Remoxy should be available later this year, and an NDA filing is planned for 2008. King is also developing a new chemical entity called T-62, which is a novel treatment for neuropathic pain.

We expect total company sales to rise about 8.6% in 2007, largely reflecting further growth in the key Altace cardiovascular and Skelaxin muscle-relaxant franchises, based on our assumption that King will be able to stave off generic competitors. Altace sales should benefit from a recent restructuring of a co-promotion deal with Wyeth (WYE) that gave King full marketing rights to that drug. We also see further growth in the Thrombin-JMI critical-care line, and initial sales from the planned acquisition of Avinza once-daily morphine drug. However, we expect sales of Levoxyl and other older products to decline.