The Health Carme M&A Monthly: Consolidation Spikes in the Generic Pharmaceuticals Market

Consolidation Spikes in the Generic Pharmaceuticals Market
Over the past few months, news in the Pharmaceutical M&A market has focused on big pharma buying late-stage biotechs and other drug development companies to find the new blockbuster as their existing drugs go off patent and lose exclusivity. To cite but one example, last month we profiled Pfizer’s (NYSE: PFE) $1.9 billion acquisition of Vicuron Pharmaceuticals.

While the loss of exclusivity may be a worry for one company, it can also represent an opportunity for another. And this is where the generic market comes into play. It is true that some drugs are so tricky to manufacture that generic companies won’t pick them up after they go off patent. But, in general, the generic companies are not faced with the costs of paying for R&D, funding clinical trials or creating a new market for the drugs.

In theory—and in practice—this translates into the ability to manufacture and sell generic equivalents more cheaply than the brand-name drugs on which they are based. Also, with the help of managed care formularies, they can begin to capture market share from their costlier brand-name counterparts.

Generic pharmaceutical companies figured prominently among this month’s Pharmaceutical M&A market. This activity appears to be, in part, a response to Novartis’ (NYSE: NVS) $8.4 billion acquisition of Hexel AG and Eon Labs, announced in February. When consummated and combined with NVS’ generic Sandoz unit, this deal will create the world’s largest generic pharma business with annual revenue of $5 billion, displacing Teva Pharmaceuticals (NASDAQ: TEVA) from its number-one position.

Rumors swirled in the German and Israeli press during late June that Teva was angling to buy Stada Arzneimittel (DE: STAGn), Germany’s third-largest generic drug manufacturer, for €36 a share for a total of €2 billion ($2.4 billion). Based on Stada’s 2004 results, the price would be 2.46x revenue and 22.8x EBITDA. Such a deal would return Teva to the coveted top spot among generic pharma companies. However, coming a year after Teva’s $3.4 billion purchase of Sicor, the biggest acquisition in Israeli history, this could stretch Teva’s resources a bit thin.

And while those rumors continue to waft through the media, Novartis has taken positive steps to open up its lead by acquiring the U.S. and Canadian consumer medicines business of Bristol-Myers Squibb (NYSE: BMY) for $660 million in cash. Based on 2004 sales of these drugs in North America, the P/R multiple is 2.7x.

Interestingly, three of the generic deals this month originated in India. This spate of activity is due, in part, to the Government of India’s enactment of tougher patent protection laws in January. In addition to making India more attractive to foreign investors, a further consequence of these laws is that Indian drugmakers can no longer sell copycat drugs at home, so they are turning to overseas markets for products. In doing so, they hope to emulate the success of Dr. Reddy’s Laboratories (NYSE: RDY).

In the largest of the these three deals, Matrix Laboratories (BO: MAXL) is paying $263 million to buy a majority interest in Docupharma (BR: DOCH), a distributor of generic drugs in Belgium. Matrix is in the process of merging with Strides Arcolab, Ltd. to form India’s seventh-largest drug firm; this deal gives the company a base of operations in the heart of the European Union.

Taking into account the cash acquired in this deal, the net purchase price drops to $238 million, and the P/R multiple is 1.9x. UBS advised MAXL while ABN AMRO and Bank Degroof advised DOCH.

Torrent Pharmaceuticals (BO: TORP) is acquiring Heumann Pharma GmbH & Co. Generica KG, a German generic business, from Pfizer for an undisclosed price. The business being sold generates annual sales of about €50 million. International operations will account for 50% of the buyer’s revenue after the deal closes, up from 24% before.

Finally, Jubilant Organosys Ltd. (BO: 530019) is acquiring up to 75% of Trinity Laboratories, which manufactures generics in North Carolina, for as much as $24.7 million.

Within the United States, Pharmaceutical Formulations (OTCBB: PHFR), one of the four largest manufacturers of private-label products, is selling substantially all of its OTC solid-dose pharmaceuticals business to privately held Leiner Health Products for $23 million. Leiner is to purchase the assets through an auction process under section 363 of the bankruptcy code.

Triax Holdings, LLC, based in Mountain Lakes, New Jersey, is buying Spear Pharmaceuticals and Spear Dermatology Products, which market and distribute a generic equivalent of a leading topical acne medication, for approximately $133 million. Triax is headed by Joseph Krivulka, a well-known industry figure who was at the helm of Reliant Pharmaceutical until November 2004.

After cashing out its investment in Housecall Medical (see page 7), Allied Capital Corporation has invested $77 million in Triax to finance the Spear acquisitions. In connection with the deal, Triax also secured $56 million of senior debt financing through Callidus Capital Finance, LLC, which will syndicate a portion of the facility post-closing. Details about revenue and cash flow were not available.