Is Pfizer's Sleeping Pill Obsession Running up King Stock?

Last Updated Aug 6, 2008 11:07 AM EDT

Trading in options on King Pharmaceuticals shares reached a four-year frenzy yesterday, Reuters reported, and King shares rose to an 11-month high on rumors that Pfizer may be interested in acquiring it.

Pfizer pfollowers know that CEO Jeff Kindler made a lot of noise a few years ago about making acquisitions to beef up Pfizer's dwindling pipeline. But then... he didn't do anything.

Reuters reports King looks like a good fit for Pfizer because of its tamper-resistant painkiller business. That may be true, but don't underestimate Pfizer's obsession with sleeping pills. King markets Sonata.

Sonata has been on the market a while, is not the subject of rumors about weird side effects like sleep-eating, but has underperformed in terms of market share, probably due to lack of consumer advertising.

Pfizer has historically showed interest in picking up a sleeping pill. As far back as 2006, Pfizer was reportedly circling Sepracor in order to pick up its Lunesta franchise. Lunesta is the second best-selling branded sleeping pill next to Ambien CR. That rumor popped up again in January. (Any takeover of Sepracor was likely complicated by its Lunesta distribution deal with GlaxoSmithKline, however.)

Pfizer has been interested in the insomnia business ever since its development deal with Neurocrine went belly up when the FDA declined to approve indiplon.

Some argue that if a master marketer like Pfizer were to take over a sleep franchise like Lunesta or Sonata, Sanofi Aventis's Ambien brands would finally get a run for their money. Maybe. But any acquirer would do well to note that King, Sepracor and Takeda have all tried to take on Ambien, and all have failed.

Here's one theory: Sleep drug takers are not like wine drinkers, who want to taste something new every evening. Rather, they're like cola drinkers. They want consistency above everything. Once they find a drug they like, they stick with it.

Original Ambien is now generic and extremely cheap -- no branded franchise is going to crumble that position. So Sanofi sits pretty with the next best, most-famous option, Ambien CR, a position that is likely impregnable -- even to Pfizer.