NEW YORK (Reuters) - Pfizer Inc, the world’s largest drugmaker, has agreed to buy King Pharmaceuticals Inc for $3.6 billion in a move to shore up earnings ahead of the looming evaporation of revenue from Lipitor, its biggest product.

People walk past the Pfizer World headquarters in New York, February 3, 2010. REUTERS/Brendan McDermid

Pfizer, which is still digesting last year’s $67 billion acquisition of Wyeth, said on Tuesday it will use existing cash to pay $14.25 a share for King -- representing a 40 percent premium over King’s closing share price on Monday.

Pfizer said it expects the transaction to add to adjusted earnings per share by about 2 cents for both 2011 and 2012 and 3 to 4 cents annually from 2013 to 2015. And it reaffirmed its earnings forecast for 2012 -- the first full year that Lipitor will be under assault by competition from cheaper generics.

The company said it expects to generate initial cost savings of more than $200 million, of which 50 percent will be realized in the first year, 75 percent in the second, and 100 percent in the third year.

Morningstar analyst Damien Conover said the premium being paid for King is on the high side, but he believes Pfizer was being conservative with its cost savings estimates.

“If you take a look at all the annual SGA (selling, general and administrative costs) at King you’re looking at over $500 million. I think a lot of that can get wiped out pretty quickly,” Conover said. “I don’t think they’ll have to keep much of that because of what Pfizer already has.”

But the huge Wyeth acquisition and even the King deal are about what Pfizer will soon not have.

Pfizer late next year loses U.S. patent protection on its iconic cholesterol fighter Lipitor, the world’s biggest-selling prescription drug which even amid declining sales will generate global revenue in excess of $11 billion this year. Once a branded drug faces generic competition, it quickly loses upward of 80 percent of revenue.

BIG BET ON PAIN MANAGEMENT

The deal will significantly expand Pfizer’s presence in the market for pain drugs by adding King’s pain portfolio to its own pain products, such as Lyrica and Celebrex.

King will bring Avinza, the Flector Patch and the recently launched Embeda, the first approved opioid pain drug designed to discourage abuse. King, a leading player in the space, has other abuse-resistant pain products in development as well.

Opioids -- which include morphine, fentanyl and oxycodone -- are powerful narcotics that can be highly addictive and prone to widespread abuse. That has led companies down the difficult path of creating powerful, long-acting pain drugs that are rendered ineffective if they are crushed, chewed or dissolved by abusers intent on defeating the time-release aspect by snorting or injecting the medicines.

The market for relief and management of chronic pain is large and increasing. About 320 million prescriptions to treat pain were written in the United States in 2009, Pfizer said.

Frank D’Amelio, Pfizer’s chief financial officer, told analysts on a conference call that its acquisition strategy will likely involve “bolt-on” acquisitions in areas such as emerging markets and generic drugs.

After a 2009 that featured a series of mega-deals in the industry -- including Pfizer gobbling up Wyeth, Merck & Co’s merger with Schering-Plough and Roche buying Genentech -- the deal front is heating up again. In addition to several recent small deals in the sector, Pfizer’s decision to buy King follows the ongoing effort of French drugmaker Sanofi-Aventis to buy Genzyme Corp for more than $18 billion.

“They’re all facing patent cliffs; they’re all having trouble with innovation in their pipelines. The one thing they all do well is sell products,” Morningstar’s Conover said.

“If they can buy more products instead of developmental stage companies, where you run the risk of trial failure or regulatory rejection, you get something that has a lower risk in that it’s a known quantity,” Conover said.

King has been struggling with sharply declining profit as a result of plunging sales of its muscle relaxer Skelaxin -- $5 million in the most recent quarter down from $102 million a year earlier -- due to generic competition, and has had its share of regulatory setbacks. Its shares hit a year-low under $8 in early July

But Bristol, Tennessee-based King has products that fit nicely with Pfizer’s enormous portfolio.

In addition to the pain franchise, King makes specialty pharmaceuticals, including the Meridian auto-injector for emergency drug delivery, and has an animal health business focusing feed additives for livestock and poultry that can easily be incorporated into Pfizer’s animal health operations. Skelaxin could be folded into Pfizer’s established products unit that features its branded products that have already gone generic.

Pfizer shares were down 0.2 percent at $17.35, while King shares were up $4.00 or 39.4 percent at $14.15, both on the New York Stock Exchange.