Should Pfizer Acquire Kos Pharmaceuticals? (PFE, KOSP, MRK)

Merck’s (ticker: MRK) recent announcement that it is developing a drug to increase HDL poses a significant threat to Pfizer’s (ticker: PFE) cholesterol management franchise. Pfizer is developing torcetrapib as an HDL raising drug that will be used in combination with its market leading statin, Lipitor; however, torcetrapib is not projected to be on the market until 2009. Merck announced that it has a drug consisting of an anti-inflammatory and extended-release niacin that it is combining with its statin, Zocor, that is expected to be on the market in 2008, one year ahead of Pfizer’s torcetrapib. If Merck is successful getting to market first with its HDL raising drug, it would deal a serious blow to Pfizer. However, there is one way for Pfizer to protect its market leadership – acquire Kos Pharmaceuticals (ticker: KOSP).

The reasons Pfizer should acquire Kos are four-fold:

• Kos would give Pfizer an immediate foothold in the HDL raising market. Niaspan is the leading drug approved for raising serum HDL, representing over $450 million in annualized sales and growing over 30%. Acquiring Kos would not only allow Pfizer to prime the market on the merits of raising HDL ahead of a torcetrapib launch but it would also enable Pfizer to enter the HDL market three years ahead of Merck.

• Niaspan would provide a safety net in the event torcetrapib fails to garner FDA approval. Torcetrapib has potential safety issues in that it has been shown to mildly increase blood pressure. If these safety issues preclude or delay torcetrapib from getting to market, Pfizer would still have a presence with Niaspan.

• The acquisition would be accretive. Pfizer would be able to leverage its current sales force to market Kos’ cholesterol products; thereby allowing Pfizer to significantly reduce Kos’ $400 million of annualized SG&A expenditures.

• Kos is trading at an attractive valuation. Kos is trading at less than 3x annualized revenue despite 50+% growth and trading at 15x 2006 earnings despite 20% projected earnings growth. Moreover, significant synergies could be realized that would drastically increase earnings under Pfizer’s corporate structure. In other words, Kos is worth more under Pfizer than as a stand alone company.

At a current market cap of $2.4 billion, Kos Pharmaceuticals would represent a small acquisition for Pfizer. Such an acquisition would provide immediate and sustainable benefits while protecting the future of its cholesterol franchise.

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