King Pharmaceuticals, Inc.

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King Pharmaceuticals, Inc.

501 5th Street
Bristol, Tennessee 37620
U.S.A.
Telephone: (423) 989-8000
Toll Free: (800) 776-3637
Fax: (423) 274-8677
Website: http://www.kingpharm.com

Public Company
Incorporated: 1993
Employees: 1,843
Sales: $1.17 billion (2002)
Stock Exchanges: New York
Ticker Symbol: KG
NAIC: 325410 Pharmaceutical and Medicine Manufacturing

King Pharmaceuticals, Inc. is a Bristol, Tennessee, company that has leveraged its position as a contract manufacturer of drugs to become a significant niche player in the pharmaceutical industry. Rather than investing in research and development, the family-run, public company has built up a portfolio of some 50 products by acquiring brand drugs from the major pharmaceuticals. King has been aided by the tendency of larger companies to focus on blockbuster drugs and pay less attention to drugs with annual sales below $100 million. Because King has been willing to devote greater marketing resources to these product lines it has enjoyed a number of successes. The company’s key product is Altace, prescribed to reduce hypertension and lessen the risk of heart attacks. King’s products are divided into four therapeutic areas: cardiovascular, women’s health/ endocrinology, anti-infectives, and critical care. Although a relatively small pharmaceutical concern, King is now a vertically integrated business, with a full range of capabilities, including sales and marketing, manufacturing, packaging, distribution, and research and development. It operates five manufacturing facilities, located in Bristol, Tennessee; Rochester, Michigan; St. Louis, Missouri; St, Petersburg, Florida; and Middleton, Wisconsin.

Founder’s Background in Pharmacy: 1970s

The primary founder of King was John M. Gregory, who was raised in the Washington, D.C. area, then earned a pharmacy degree from the University of Maryland in 1976. He was 28 when he and his wife moved to the small town of Bastian, located in the Appalachian hills of southwest Virginia some 70 miles north of Bristol, Tennessee. The only pharmacist in the county, he worked out of a makeshift office in a converted garage that adjoined the only medical clinic in the area. Life in such a remote location fueled Gregory’s imagination, and he soon came to the conclusion that the standard method of distributing drugs by personally visiting physicians and pharmacists was outdated and that telephone contacts would be just as effective, as well as less expensive. He shared his idea with the county’s only lawyer, Randal J. Kirk, and the two men decided to go into business together. Between themselves and local investors they raised $100,000 and launched General Injectables and Vaccines Inc. (GIV) in 1984.

With Kirk serving as chairman of the company and Gregory as president, GIV set up shop with four employees in a 3,000-square-foot building, at first selling perishable drugs and vaccines. Establishing the business proved to be a far more daunting task than Gregory had anticipated, exacerbated by personal problems. According to Forbes,“Late one night in 1987, John Gregory reached for a gun, ready to take his life. His wife had left him, and his business ... was a shambles. All because Gregory had succumbed to the ravages of alcohol. At the last minute he relented, and decided to seek help from a pastor. Soon after, Gregory became a born-again Christian.” With stability in his life, Gregory was able to begin growing GIV, adding both new products and customers. The rise of biotechnology, which relied heavily on injectable medicines, also boosted GIV s business, as did the growing demand for one of its vaccines for Hepatitis B. Rather than take the company public, Gregory and Kirk preferred to maintain their independence and consequently funded expansion by investing profits back into the business. They also used GIV to launch other companies, such as Lotus Biomedical Corp., which produced its own brand-name drugs that GIV and other wholesalers distributed. In 1993 GIV acquired Williams Generics, a Memphis mail-order catalog operation that targeted pharmacies, which was then merged with an existing business to create InSource-Williams Inc., selling generic drugs to some 10,000 retail pharmacies. These other ventures took on greater importance in the 1990s as GIV saw its margins shrink, due in large part to the trend of Pharmaceuticals electing to do their own sales, thus cutting out distributors. Gregory and Kirk realized it was necessary that their operations become vertically integrated, which meant producing drugs for GIV to sell.

Move into Manufacturing in 1993

An opportunity to move into manufacturing appeared in 1993 when one of GIV s customers, RSR Pharmaceutical, decided to focus its efforts on the manufacture of pesticides rather than produce drugs on a contract basis for Pharmaceuticals. RSR was housed in the former Beecham Laboratories buildings in Bristol that had become available when Beecham merged with SmithKline and moved its operations to Philadelphia. Not only was the facility suitable for their needs, Gregory and Kirk recognized the value of RSR’s existing contract with Smith-Kline. In the fall of 1993 they founded King Pharmaceuticals, the name paying homage to Gregory’s faith, with Kirk again serving as chairman of the board. At first King merely helped RSR, but soon Gregory was able to convince SmithKline to transfer its manufacturing contracts. In January 1994 King acquired the 500,000-square-foot RSR facilities for $1.18 million. The company then filed for FDA approval to make its own generic drugs, in the meantime utilizing about 20 percent of the plant and employing 90 people to produce drugs for SmithKline as well as Ciba-Geigy and Boehringer Mannheim. Gregory’s brothers also became involved with the business: Jefferson, a trained pharmacist himself, became a vice-president and general manager to handle day-to-day affairs; Joseph, a GIV executive, was on the board of directors; and half-brother R. Henry Richards, a physician, became medical director. By the end of 1994, however, Kirk and John Gregory decided to go their separate ways. Kirk resigned as King’s chair and severed his relationship with the company. Gregory, on the other hand, retained his ownership stake in GIV, and assumed the chairmanship and CEO roles with King. The company ended its first year of operations generating $13.3 million in revenues and net income of $917,000.

King quickly pioneered a strategy of acquiring branded prescription drugs that were being divested by major global pharmaceutical companies, which were not only increasingly focused on blockbuster drugs but also getting caught up in a period of consolidation. Many mergers resulted in companies having duplicate drugs they did not wish to support. King’s first venture in the drug castoff arena was the Boehringer painkiller Anexia, a $6-million-a-year drug that King acquired in December 1994 for a $17.5 million promissory note payable at the end of a year. When the note came due, the company was unable to pay it off, but salvaged the situation by selling Anexia and a generic version of the drug to Mallinckrodt for $32 million. Despite less than stellar success with its first branded drug, the company recognized the potential of its business model. Rather than a 20 percent gross margin realized from contract manufacturing, branded drugs produced 75 percent gross margins.

In 1995, looking to become involved in the cardiovascular therapeutic area, King targeted the Hoechst drug Altace; despite producing nearly $90 million in revenues and boasting a patent that ran until 2008, Altace was not being promoted by its parent. When Hoechst merged with Marion Merrill Dow in 1995, Jefferson Gregory attempted to pry away Altace but at this juncture his bid was turned down. The company was more successful, however, in acquiring other branded drugs. In 1997 King paid $54 million to Glaxo Wellcome, Inc. to pick up the Cortisporin and Viroptic product lines, and six other branded products. In February 1998, at a cost of $127.9 million, King added 15 branded pharmaceutical products from Warner-Lambert Company, as well as a sterile manufacturing facility in Rochester, Michigan, which included manufacturing contracts for third parties. To help fund its expansion, King went public in June 1998. The offering, led by Credit Suisse First Boston, netted $87.5 million and was the largest in the pharmaceutical sector for that year. Also in 1998 the company established King Pharmaceuticals International to distribute its products around the world.

Company Perspectives:

Relying on talented and dedicated employees, following a proven strategic vision, and developing trusted relationships with other drug companies, wholesalers, physicians and pharmacists, King is redefining the standards for success in pursuing opportunities in the health care industry.

Purchase of Altace: 1998

King’s most significant deal occurred in late 1998 when its persistence paid off with the addition of Altace, which had finally become available after Hoechst announced its intention to merge with Rhône-Poulenc, a combination that resulted in Aventis. King paid $362.5 million for Altace and two lesser drugs, anti-infective cream AVC and burn cream Silvadene. On the $91.3 million combined sales of these products in 1997, Altace contributed $83.7 million. Believing that Altace possessed even greater potential, King increased the number of sales reps promoting the drug from 150 to 600. The company’s ability to exploit Altace was greatly enhanced by the findings of an international clinical study of the drug called Heart Outcomes Prevention Evaluation, or HOPE. Although aware of HOPE when acquiring Altace, King had no idea how significant the trial would be. HOPE evaluated some 9,500 patients who were susceptible to heart attacks, strokes, and coronary heart disease. The study revealed that Altace produced a combined 22 percent relative risk reduction of heart attack, stroke, and cardiovascular death, regardless of the patient’s age, gender, or existing coronary artery disease. The findings were so significant that the New England Journal of Medicine felt the need to post the results on its Website in November 1999 rather than wait to make the announcement in its January 2000 issue. Later the FDA granted its approval for new indications of the drug and the Stroke Council of the American Heart Association recommended the use of Altace to reduce the risk of stroke in diabetics. To further its ability to sell Altace, King entered into a co-promotion agreement with the Wyeth-Ayerst division of American Home Products (A?P), adding another 1,000 sales reps to promote the product to cardiologists and primary care physicians. Under terms of the deal, Wyeth paid King $25 million and agreed to purchase $75 million of the company’s common stock. Wyeth paid another $50 million when the FDA gave its approval of the new indications. In a subsequent deal, King acquired from Wyeth the U.S. and Puerto Rican rights to the oral contraceptive Nordette, as well as the injectable antibiotics Bicillin and Wycillin.

As Altace developed into a cash cow, King continued to add product lines. In 1999 the company purchased the antibiotic Lorabid from Eli Lilly for $91.7 million. The following year King acquired St. Louis-based Jones Pharma Incorporated in a $2.4 billion stock swap, a deal that added 100 sales reps and helped to diversify King’s product lines by adding thyroid medications Levoxyl and Cytomel/Triostat, anesthetic Brevital Sodium, and Thrombin-JMI, used to control blood loss during surgery. It was a deal not well received on Wall Street, however, with the stock of both companies punished after the merger was announced. While the addition of Jones added more stability to the business, King was growing so much faster than Jones that many investors were worried about King slowing down, clearly more interested in short-term performance than long-term growth—an example of why John Gregory resisted taking GIV public a decade earlier. Nevertheless, the deal was not scuttled by lower stock prices and shareholders gave their approval in September 2000.

In 2000 King Pharmaceuticals International struck a deal with Tecnofarma, S.A. to distribute the company’s estrogen replacement product, Menest, throughout Latin America. Moreover, in 2000 the parent company used stock worth $366 million to acquire North Carolina-based Medco Research, makers of drugs that complemented King’s cardiovascular portfolio. Medco then became a subsidiary, renamed King Pharmaceuticals Research and Development, Inc. The acquisition also marked a slight change in emphasis in King’s business model. Other companies had emulated its strategy of exploiting castoffs from the major pharmaceuticals, which resulted in ever increasing prices for these product lines. According to Forbes,“Rivals that once played the same game as King have moved on to research their own blockbuster drugs in hopes of far greater profits.” King’s acquisition of Medco reflected a modest attempt to develop drugs. The company budgeted $26 million for R&D in 2001 and $35 million in 2002, 3 percent of revenues as opposed to the 10 percent spent by some rivals. King planned to continue buying drugs, avoiding the expense of R&D and lengthy clinical trials, combined with a modest effort at drug development. In 2001 the company paid more than $285 million to Bristol-Myers Squibb to acquire three drugs and a license to a fourth product. At the same time as it was striking a balance between acquisitions and development, King was gradually moving away from contract manufacturing, commandeering that capacity as its own product lines grew. The company planned to continue contract manufacturing, but now limited its participation to contracts offering high volumes and sizeable revenues.

Due in large part to the success of Altace, King experienced robust growth since going public in 1998, when at year’s end revenues and net income totaled $261.6 million and $79.5 million, respectively. In 2001 the company posted sales of more than $825 million and profits of nearly $218 million. King continued to add product lines in 2002, acquiring hormone replacement therapy Ortho-Prefest from a Johnson & Johnson subsidiary. In addition the company achieved some diversification in 2002 by acquiring Meridian Medical Technologies, makers of auto-injectors, in a $247.8 million stock transaction. The quick drug delivery system was of particular interest to the military and domestic emergency responders for such applications as nerve gas antidotes, especially in light of potential terrorist attacks following the events of September 11, 2001. John Gregory, in the meantime, stepped down as CEO at the age of 50, turning over day-to-day responsibilities to his brother Jefferson. Although he would stay on as chairman of the board, John Gregory began to devote an increasing amount of his time working for the King Pharmaceuticals Benevolent Fund, which spread Christianity to developing nations in part by dispensing acetaminophen tablets imprinted with “Jesus Loves.”

Principal Subsidiaries

Monarch Pharmaceuticals, Inc.; Parkdale Pharmaceuticals, Inc.; King Pharmaceuticals Research and Development, Inc.; Jones Pharma Incorporated.

Principal Competitors

Forest Laboratories, Inc.; ICN Pharmaceuticals, Inc.; Watson Pharmaceuticals, Inc.

Key Dates:

1993:: Company is incorporated.
1994:: Bristol, Tennessee, facility is acquired.
1998:: Company goes public; acquires the Hoechst drug Altace, which becomes its key product.
2000:: Company acquires Jones Pharma Incorporated.
2002:: John Gregory steps down as CEO.