The Health Care M&A Monthly: Pharma Dominates Deal Making--

Twenty-One Deals Announced In March Worth $6.2 Billion

Deal making in the Pharmaceutical sector dominated the health care merger and acquisition market for March 2010. This single sector produced 21 deals, or 30% of  the month’s total deal volume. With $6.2 billion committed to fund this activity, Pharmaceuticals accounted for 47% of the $13.2 billion spent on all health care M&A for the month.

March saw the conclusion of a three-way battle for Ratiopharm GmbH, Germany’s second largest generic drug maker. After a protracted auction process, one that is rare in Europe’s more rarefied M&A climate, Israel’s Teva Pharmaceutical Industries (NYSE: TEVA), the world’s largest generic pharma company, prevailed over both Pfizer (NYSE: PFE) and Iceland’s Actavis Group to acquire Ulm-based Ratiopharm. The company sells about 750 medicines for cardiovascular, respiratory, CNS and other diseases, and generates annual revenue of about $2.3 billion. As reported in previous issues, this company came on the market early last year as the Merckle family, the principal owners, sought to cut its losses from the recent financial melt-down by selling off assets; this month it concluded the sale of Switzerland’s Mepha AG, another generic drug firm, to Cephalon (NASDAQ: CEPH) for $588.0 million.

In effect, this deal makes Teva the second largest supplier of generic drugs in the world’s second largest generic drugs market—behind Novartis’ (NYSE: NVS) Hexel subsidiary. In the near term, this acquisition will allow Teva to capitalize on cuts by the German government on drug prices scheduled to come into effect August 1. The cuts include forced discounts of up to 16% and a ban on price increases for branded drugs. As these measures push consumers from branded to generic drugs, Teva stands to reap the benefits. Ratiopharm is present in 10 European countries so Teva will heighten its profile in a market where it had previously had a minor presence.

Teva is paying $4.97 billion, or approximately 2.2x revenue, for this acquisition. Commerzbank and Royal Bank of Scotland managed this sale; Goldman Sachs provided Teva with financial advice.

This outcome leaves Pfizer holding the proverbial bag. Some analysts have speculated that PFE may want to use the cash in that bag to expand its presence in the generic drugs market through the acquisition of one of Ratiopharm’s closest competitors. This has led them to place Stada Arzneimittel (DE: STAGn), Germany’s third largest generic pharma, in Pfizer’s gun sights. Apparently, Stada’s CEO Hartmut Retzlaff took the rumor seriously enough to say that the company would not block an attractive acquisition bid. Mr. Retzlaff noted, “Should we get a takeover offer that values the company at a level that we cannot achieve on our own strength, we would not block it.” Naturally, the trick is determining precisely where that level lies. Some believe that a 40% premium to Stada’s current market cap would get management to sit up and take notice. That implies an equity value of €2.5 billion ($3.3 billion); however, inclusion of Stada’s debt would jack the overall price up to €3.5 billion ($4.7 billion). Special care must be taken to woo Stada management because of the company’s capital structure. It has “vinculated” shares which, under German law, can change hands only with top management’s consent. So the issue becomes whether Pfizer wants to pay virtually the same price for a lower-ranked competitor. If so, to begin with, Pfizer needs to re-purpose some of its cash and send a really nice gift basket to Stada’s management.

All other Pharmaceutical deals announced in March came with price tags of under $500.0 million. It should be noted that in keeping with the increasing of globalization of the economy, seven of the top ten deals involve cross-border transactions.

Bristol-Myers Squibb (NYSE: BMY) took part in two deals. In the larger of the two, Allergan (NYSE: AGN) is granting BMY exclusive worldwide rights to develop, manufacture and commercialize AGN-209323 and backup compounds in phase 2 clinical development for the treatment of neuropathic pain. The total value of the alliance is worth $413.0 million, consisting of $40.0 million in cash upfront and up to $373.0 million in milestone payments. This agreement covers all indications for these investigational candidates except ophthalmology indications for products formulated for local delivery to the eye, where AGN will retain certain rights. The molecule was discovered as part of a collaboration between AGN and ExonHit Therapeutics SA. In the smaller of BMY’s two deals, Atlanta-based NeurOp Corp. is entering into an agreement with BMY to develop potential treatments for depression and CNS disorders. The deal is potentially worth $75.5 million.

In March’s third largest pharma deal, Bayer Schering Pharma (DE: BAYGn) is entering into a research collaboration and license agreement with Prometheus Laboratories to use Prometheus’ proprietary oncology diagnostic platform to develop novel oncology therapeutic products. Worth $160.0 million if all candidates are developed and receive regulatory approval, this collaboration will use Prometheus’ diagnostic platform in conjunction with Bayer’s oncology pipeline in an effort to “stratify” patients to appropriate drug candidates. This marks a step forward in Bayer’s goal of providing more personalized medicine, tailored to individual patients or groups. Prometheus’ platform will, it is believed, help both to identify patients who will benefit most from drugs and to design clinical trials.

India’s Strides Arcolab (BO: 532531) announced two deals in March. The company is paying $117.0 million to buy out its partner’s 50% interests in Onco Therapies, Ltd., India and Onco Laboratories Ltd., Cyprus, which include a portfolio of oncology drugs. The partner is South Africa’s Aspen Group (JSE: APNH). As a result of this deal, Strides will gain ownership of a key range of drugs in its specialty pharma business. The company has 40 oncology products in phase 1 of human trials and 16 in phase 2.  It will also license the existing and future products to Aspen Group’s Pharmacare unit in certain regions. The deal is to be financed through a combination of licensing revenue and bridge loans. Strides and Aspen began a series of joint ventures in 2007. In a second and related deal, Strides is paying $75.0 million to acquire Aspen’s manufacturing facility in Campos, Brazil. The factory manufactures penems and penicillin, and delivers $40.0 million on an annualized basis. This acquisition increases Stride’s manufacturing capacity for its specialty injectable business, allowing the company to better service the various licensing agreements for penems it has made with a number of customers worldwide.

Watson Pharmaceuticals (NYSE: WPI) was involved in the fifth and sixth largest deals, as seller and buyer, respectively. In the first instance, Watson is divesting its 31% interest in ScinoPharm, a producer of active pharmaceutical ingredients, or APIs, to ScinoPharm Taiwan, Ltd. for $94.0 million. WPI acquired its initial equity interest in ScinoPharm in 2004 as part of its program to increase access to unique APIs. But as the company has increased its own commitment to APIs, holding a stake in ScinoPharm is now of less strategic value so the company is divesting its interest. Perhaps Watson will use the proceeds from this sale to finance the $92.5 million acquisition of the U.S. rights to crinone and prochieve, from Columbia Laboratories. The two are bioadhesive progesterone gel products for indications of infertility and secondary amenorrhea. Under terms of the deal, Watson will make a $47.0 million upfront payment, as well as milestone payments of up to $45.5 million for a new indication for the drugs.  Further, Watson is also to receive 11.2 million shares of Columbia stock. The two companies are to collaborate in the ongoing phase 3 development program toward a new indication for these products for the prevention of preterm birth in women with a short cervix.

Dragon Pharmaceuticals (OTCBB: DRUG), a British Columbia-based manufacturer of antibiotic products, has received a take-private offer from its CEO. Yanlin Han has formed Chief Respect, Ltd., a Hong Kong company, to acquire DRUG at $0.82 per share. This proposal offers shareholders a 19% premium to the stock’s prior-day price, and a 37% premium to the stock’s price the day before Mr. Han announced his intention to privatize the company some weeks earlier. Mr. Han already owns approximately 37% of DRUG so what will be paid out is effectively $34.1 million for the remaining equity and $1.7 million for certain stock options. The intention is to relocate Dragon’s operations to the Far East. One side effect of the deal is to free up a catchy ticker symbol. Any takers?

The Perrigo Company (NASDAQ: PRGO) is paying $48.0 million in cash to acquire Orion Laboratories. Based in Perth, Australia, Orion supplies OTC store brand pharmaceutical products in that country and New Zealand.  This acquisition, valued at 1.6x revenue, expands the buyer’s global presence. PRGO recently closed on the sale of its Israeli consumer products business to Emilia Group; the proceeds from that divestiture will be used to fund its acquisition of Orion.

In order to raise some capital in a nondilutive manner, NPS Pharmaceuticals (NASDAQ: NPSP) is selling certain royalty rights from sales of Regpara (cinaclet HCI) to Toronto’s DRI Capital for $38.4 million. Japan has approved the drug for the treatment of patients with secondary hyperparathyroidism during dialysis therapy. Under terms of the deal, NPSP is retaining cumulative royalties of $96.0 million. In essence, sale of part of the royalty stream deal allows NPSP to access significant capital which will be used to support two of the company’s registration programs.

Lonza (VX: LONN), the Swiss drug supplier, is in talks to acquire over 51% of India’s Aptuit Laurus in a deal that is valued at between $77.0 million and $99.0 million. A price of $88.0 million would imply a price to revenue multiple of about 3.4x for a 100% interest in the Hyderabad-based company.