King Without the Crown

June 1, 2006
Sara Calabro
Pharmaceutical Executive
Volume 0, Issue 0

Under King's old strategy, there was no link between business opportunity and R&D. Today, the company only goes after drugs that meet the criteria of its targeted approach to acquisition.

The head of R&D is odd man out at King Pharmaceuticals—and not just for his disarming name. King Jolly has a Southern accent. Despite the company's Bristol, Tennessee headquarters, most senior executives are based in New Jersey, and sound like it. Jolly rides with a motorcycle club; his counterparts live and breathe hockey. And he patiently answers questions about the Christian fundamentalism of his former bosses, John and Jeff Gregory. Other King executives keep mum on the subject. Even so, the biggest difference between Jolly and the rest of the senior team is his background. He is a scientist. Everyone else is all business.

Jolly joined King in 2000—not quite the company's low point, but getting there. The Gregory brothers had built their young company rapidly by acquiring cast-off drugs that were commercialized already—a strategy similar to the one employed by Forest, and not a bad way to go in a time of heavy merger activity. But by the time Jolly arrived, King was already in a downward spiral of lawsuits, bad debts, and SEC investigations that would bring it to the brink. Jolly, who came from the contract research company Quintiles, was brought on board to run something new at King—R&D.

Clockwise, from top left: chief financial officer Joe Squicciarino; chief commercial officer, Steve Andrzejewski; executive vice president, business development and strategic planning, Adriann Sax; executive vice president, R&D, King Jolly. Squicciarino, Andrzejewski, and Sax were recruited to King by CEO Brian Markison, who was hired in 2004 to replace co-founder and CEO Jeff Gregory. Jolly has been with the company since 2000, the year King bought Medco to form its first-ever R&D group, now called King R&D.

It wasn't much as R&D departments go—a 10-person group acquired from Medco—but it let King shift its focus to new formulations and drug candidates in late stages of development. Today, the unit employs 62 scientists and spends $74 million a year on internal R&D, a huge amount by King's old standards, though still only four percent of revenues—and a fraction of what most pharma companies spend. The secret? King has no laboratories. It farms out all drug development activities to academic institutions, other pharma and biotech companies, or contract research organizations.

The industry has been taking a hard look at virtual R&D in recent years. While most have concluded that the strategy has only limited usefulness for a traditional Big Pharma company, the efficiencies King has achieved are too impressive to ignore. The jury may still be out on how well the strategy serves King in the long run, but so far, this hardheaded approach has done a lot with a little. Virtual R&D may not be pharma's next business model, but it already shows signs of being a worthwhile addition to any company's toolkit.

The Pain Deal

Born Again

The second coming of King began in March 2004, when it became apparent that the Gregorys' mistakes had put the company in a nearly indefensible position: Inventories were through the roof, sales and marketing expenses were excessive, and King's product portfolio was facing attacks from multiple competitors. Not only did the Gregorys have no answer for any of these challenges, but their top-heavy management structure hampered the search for a solution. As part of its plan to eliminate the infamous founders, the board encouraged then-CEO Jeff to recruit a potential successor. He decided on Bristol-Myers Squibb's president of virology and oncology, Brian Markison, who left the company he'd been with for 22 years to become King's COO.

The plan was for Markison to work with Jeff for about a year, then succeed him. But a week before Markison's first day on the job, he got word that Jeff—having reached a point of irreconcilable differences with the board—would be leaving the company immediately. Committed to doing a CEO search, King's board interviewed about seven candidates, while Markison went to work on beefing up corporate compliance, identifying manufacturing inefficiencies, and coming up with a plan for how to defend King's brands against forthcoming generic threats. Impressed, the board put the incumbent in charge.

The Final Three

Markison sometimes comes off more as court jester than king. He jokes around with his executive team, many of whom he personally recruited to replace members of the old regime. At five feet seven inches, this 46-year-old with a buzz cut projects a demeanor more of family man than the man. But his colleagues, who feel free to answer his joking comments with barbs of their own, acknowledge his position—boss of a $1.77 billion (2005 revenue) public company that was teetering on the edge until he arrived. When the discussion turns to business, Markison's fellow execs pipe down and let him do the talking. He demonstrates a level of confidence that makes it obvious why he was chosen to lead a company that, in his own words, "two years ago, was about to become nonexistent."

That's when Mylan Laboratories announced its plan to buy King for $4 billion. Markison, who says he didn't find out that King was in merger discussions until two weeks after he joined the company, was theoretically in favor of the deal. "I think the idea"—joining a generic drug maker with strong manufacturing capabilities, with a branded company with expertise in commercial operations—"was brilliant." Not everyone agreed. The deal unraveled when billionaire investor and Mylan shareholder Carl Icahn became convinced that, given King's rocky past and imminent struggle against generics, it was not worth the $4 billion Mylan was offering to pay. And even Markison admits that Mylan was really "not prepared" to take on this kind of transaction. "They didn't have the right management team," he says.

Injecting Profits

Making the Cut

Markison knows a thing or two about choosing a management team. When he arrived at King, as he politely puts it, "we invited people to leave the company, and we invited people to join the company." More specifically, Markison wiped the slate clean of senior executives who had the old King on their breath. He replaced them with a group that, he says, he would pit against any team in the industry.

His first big hire was chief commercial officer Steve Andrzejewski, a 40-year-old MBA who was running commercial operations at Endo Pharmaceuticals. Before Endo, Andrzejewski was vice president of new products for Schering-Plough, where he's largely credited with Claritin's rise to the top of the antihistamine charts. Andrzejewski gives off a whiz-kid vibe: He speaks with immense authority, but his face, behind glasses, is boyish.

As head of King's commercial efforts, Andrzejewski is responsible for making sure the company's approach to R&D is not just a money saver, but also a moneymaker. Under King's old strategy—after it added the R&D subsidiary, but before Markison & Co. joined—there was no linkage between business opportunity and R&D.

The company functioned as "more of a pharmaceutical M&A shop than a focused corporate entity," says Remi Barbier, CEO of Pain Therapeutics, one of the companies with which King recently entered a partnership (see "The Pain Deal," left). King tended to in-license drugs without regard for therapeutic areas or relevance to its scientists' fields of expertise.

Creating a more strategic in-licensing program has been Andrzejewski's main mission. Under his direction, the company has moved from its historical model of acquiring mature drugs in late stages of commercialization to pursuing products in late stages of development. It's also started taking better care of products that the former management team never groomed to full potential.

One goal is to decrease susceptibility to patent expirations. Under its old model, King would acquire drugs that were about to go off patent or that already faced substantial competition from me-toos. Many of its important drugs—Altace (ramipril), an ACE inhibitor ($554.4 million in 2005); Skelaxin (metaxalon), a muscle relaxant ($344.6 million); Levoxyl (levothyroxine), a thyroid hormone replacement ($139.5 million); and Sonata (zaleplon), for insomnia ($83.2 million)—are about to face generic competition. These four drugs accounted for about 63 percent of King's revenue in 2005.

King's efforts to acquire new drug candidates and support existing products both center, in large part, on positioning itself as a partner of choice. The deal King cut in November 2005 with Pain Therapeutics exemplifies its strategy of going after drugs in development. The companies joined forces to develop and commercialize abuse-resistant painkillers, the most promising of which is currently in Phase III trials. King entered a similar deal in August 2004 with Palatin Technologies to develop and commercialize bremelanotide, in Phase II for erectile dysfunction, and for potential treatment of female sexual dysfunction.

To realize the full potential of existing products, King is forming partnerships like the one it did with Arrow International Limited in February 2006 to commercialize new formulations of Altace. Under the agreement, King has intellectual-property and technology-licensing rights to novel formulations of the drug, and Arrow has manufacturing and supply responsibilities. King made an up-front payment to Arrow of $35 million, and will make additional payments to the company of as much as $75 million, plus fees for the manufacture and supply of new formulations.

King also is approaching this element of the strategy by upping promotional efforts on some of its drugs, such as Thrombin-JMI, a topical hemostat used by surgeons to stop bleeding. Although Thrombin is facing potential branded competition, King considers it worth the investment. Markison calls hemostasis an "under-penetrated" market in which physicians will continue to prescribe Thrombin as awareness of the drug improves. Thrombin had never been promoted under the company's previous management team, says Andrzejewski: "To this day, surgeons are like, 'Well, I think I've heard of it, but I'm not sure.' It's a lot of opportunity that we can continue to go after." King's hospital sales force of 112 reps is promoting the drug.

Breaking It Down

This approach to business development is grounded in King's decision to divide its branded pharmaceutical business, its biggest source of revenue (87 percent in 2005), into three therapeutic areas: Cardiovascular/Metabolics, Neuroscience, and Hospital/Acute Care (see "The Final Three," right). Each group has its own senior leader, as well as its own sales force, profit and loss objectives, feasible R&D projects, and goals for lifecycle management. The approach is designed to create a better link among corporate strategic goals, new business opportunities, and R&D—in essence, to create a formalized method for filling gaps in each business segment.

King credits Adriann Sax, head of business development, with the idea to divide the business this way. Sax came to King by way of Merck, where she was hired to start developing its cancer business. She was there just a few months when she received a call from Markison (the two were colleagues from Bristol-Myers Squibb), who was looking for "somebody who's good in strategy," recalls Sax. Soon after she started with King, the company's then-head of business development was asked to leave. Sax, a self-proclaimed "big mouth," says she "asked for the position" upon her predecessor's departure. Markison agrees with his old friend: "I think she elbowed her way into it."

Joe Squicciarino, King's CFO and the most recent addition to Markison's lineup, is also a Sax supporter. But the natty, mustachioed, former Revlon exec cautions against off-message remarks. Still, he can't rein in Sax: "Our flexibility, agility, and creativity is like a buffet," she says. "We have some very unique capabilities—our commercial infrastructure, our R&D organization. You can either have a little of everything or you can select what you want."

Virtual Reality

Unlike many pharmaceutical companies, where the relationship between R&D and commercial operations is likened to church and state, King prides itself on its philosophy of meshing the two. Executives at the company, with the exception of Jolly, are uncommonly—and refreshingly—forthright about their priority: making money.

At King, says Sax, "there isn't anybody who doesn't touch business development at some point." That includes King Jolly, who says, "We have profiles, certain types of compounds that we look for to meet certain needs of our sales force, that meet revenue and net-income requirements."

For example, there's Remoxy, the most advanced product currently being developed through the King–Pain Therapeutics partnership. "What really got us excited about it is the large commercial opportunity," says Steve Andrzejewski. "It has a very high chance of getting to the marketplace because it's not a new chemical entity; it's simply a new formulation."

King's definition of "R&D" is different than most other pharma companies'. In addition to the $74 million spent in 2005 on the development of investigational drugs and on lifecycle management, the company spent about $189 million on acquiring rights to research in progress from third parties.

"What we're doing is avoiding mistakes," Markison says of the company's approach to R&D. "It's common knowledge that there's a research and development drought in the pharmaceutical industry. But really what that speaks to is compounds coming out of discovery programs that are designed to feed these very large companies. We're not a discovery-laden company."

King does maintain a small discovery effort, but it exists as a sort of weeding-out tool, mainly for the purpose of helping commercial operations identify viable business opportunities. "We have the expertise to really understand through due diligence what we're looking at," says Markison, "and what we're going to take on in partnership mode."

King's critics are less kind: "We see King like remora fish stuck on the side of the shark," says Derek Lowe, author of industry blog In the Pipeline. "We see these people as living off the fruits of our labors."

Jolly takes such criticism in stride. Collaboration is the soul of R&D at King. In fact, Jolly says the company has had to attract a "peculiar type of animal" to the department. On one hand, "We didn't want people who would just throw things over the wall [to a CRO or other partner] and not take ownership for it," he says. But, it also was important to find "people who knew the contracting business and knew how to get maximum productivity out of the people you contract with—people who know how to recognize the signals as to when things are going awry." Not surprisingly, about half of Jolly's staff held previous positions in contract services businesses.

King R&D's non-possessive attitude is what's allowed the department to function "like a central processing unit in a computer," says Jolly. "We have every function that you'd find at a pharmaceutical company"—preclinical, discovery, pharmacology, toxicology, etc. "The difference is, we don't have the operational overhead." Some of King's scientists, through affiliations with noted experts in their fields, work collaboratively in academic labs. But mostly, scientists at King leave their white coats at home, sit at desks, and function like project managers.

Benched

Jolly doesn't see King's take on R&D as scientifically compromising. "We still control the science," he says. "We make sure that we design the plan and the scope. We rely on others to execute."

And financially speaking, King believes its approach only makes sense. The company recently underwent a benchmarking process that examined its R&D department with respect to time and cost. It uncovered comparable timelines with the rest of industry, but substantially lower costs.

"That's why we are running 12 or 13 programs with 62 people," says Jolly. "In our development, our key mantra is to do only the minimum number of studies necessary to get a drug approved, to plot a critical path, and to outsource as much of it as you can, as quickly as you can." Jolly boasts about one of his clinical scientists, who currently is in charge of four major programs. "If you were to go into industry, you probably would never find one person running four major programs."

Perhaps not today, but the economic pressures of the next few years seem likely to drive other companies to consider King's achievements in virtual R&D, even if few of them attempt to make it the centerpiece of their product-development strategy. There's little doubt that King is making strides with something that will soon be seen as a key pharma skill set. But will it be enough to create a sustainable business with growth potential? Can a virtual approach rise to the new data demands posed by payers and others? Will there be enough late-stage products on the market to feed King's pipeline? The "remora" companies like King have had an interesting place in pharma. Increasingly, though, they're going to face the challenge King is grappling with right now: Get a new grip and hang on for the ride—or learn to swim alone.

Did You Know? Contrary to popular belief, King Pharmaceuticals is not named after Jesus, a falsity often cited in the business press. The company's founders had two reasons for picking the name: King College is a prominent institution in Bristol, TN, where King is headquartered. King Pharmaceuticals' founders paid homage to the college and its founding family by naming their company after them. Also, King Pharmaceuticals' logo spells the name "KING," nestled within a crown. The big "K" stands for Kirk, as in Randal Kirk, one of the company's original founders, who resigned shortly after King was formed. The big "G" stands for Gregory, the family that controlled the company until 2004. King's new management team plans to stick with the King name, but is doing away with the crown logo.