The Health Care M&A Monthly: March Merger Mania in Pharma

 
Europe Sees A Flurry of Springtime Dealmaking In The Pharmaceutical Industry, As Bayer Leads The Pack With A $19.5 Billion Bid for Schering AG

March saw a surge of M&A activity in the pharmaceutical sector, particularly in Europe. A  total of 17 deals were posted during the month, with a combined price tag of $23.9 billion, based on revealed prices.

Nine of the month’s deals involved European-based pharma companies, acquired with $20.9 billion, primarily in Central Europe. The remaining $2 billion was spent on seven deals in North America and one in Japan. In nine of the transactions, the acquirer was a foreign-based concern, with six headquartered in Europe and three in India.

Bayer’s Big Buy
One deal captured the lion’s share of this action. Germany’s Bayer AG (NYSE: BAY) made an offer of €86 ($103.67) per share to buy Schering AG (NYSE: SHR), a research-based pharmaceutical company. Valued at $19.5 billion, this single transaction accounts for 82% of the dollars spent in the pharma M&A market.

Bayer is a diversified chemical and pharmaceutical company which, on a trailing 12-month basis, generated revenue of $32.9 billion. Based in Berlin, Schering makes specialty pharmaceutical products and contrast media used in imaging systems. Its business focuses on four general areas: gynecology and andrology, oncology, diagnostic imaging and specialized therapeutics for disabling diseases. In its most recent financial year, Schering generated revenue of $6.4 billion, EBITDA of $1.5 billion and net income of $707 million.

In the wake of the $8 billion merger between Teva Pharmaceutical Industries (NASDAQ: TEVA) and IVAX Corp., which closed in January to form the world’s largest generic pharma company, many smaller pharma concerns, whether generic, specialty or niche companies, were put into play, Schering among them. Merck KGaA (DE: MRCG) liked what it saw, and made a hostile takeover bid early this March, offering  €77 per share, or  $17.9 billion, which Schering’s board rejected.

This is where Bayer stepped in as a white knight and countered with its $19.5 billion offer, which Schering’s board endorsed, ultimately realizing the company could no longer remain independent. Rather than entering into a bidding war, Merck KGaA withdrew from the field, so there is now no point in buying up stock in the hopes that its share price will be bid up further. The deal is to be financed by €3 billion in cash on hand and a new credit line provided by Credit Suisse and Citigroup. To help raise some of that cash, Bayer will spin off its H.C. Starck and Wolff Walsrode subsidiaries, which are involved in manufacturing plastics and chemicals.

This deal, the largest Bayer has undertaken in its 142-year history, offers Schering shareholders a 29% premium over the stock’s price before Merck KGaA’s hostile bid. The price to revenue multiple is 3x; the price to EBITDA multiple, 13x. The combination of the two companies, to be called Bayer Schering Pharma and based in Berlin, will result in a firm with strengths in anti-infectives, cancer drugs, treatments for MS and contraceptives.

Bayer, which had been wavering between Schering’s specialty pharma and Pfizer’s (NYSE: PFE) consumer health care business, valued at about $14 billion, has decided to throw its lot in with the higher-margin specialty business. Bayer anticipates that as a result of this deal, SHR’s EBITDA margin will grow from its current 19% to 25% by 2009 and contribute to growing the long-term EBITDA margin for Bayer Group as a whole.

Central Europe Consolidates
Apart from this mega-deal, the Pharmaceutical industry saw other, concerted M&A activity in Central and Eastern Europe during March. Sanofi-aventis (NYSE: SNY) is acquiring a 24.9% stake in Zentiva (PR: ZNTVsp), a generic pharma company based in the Czech Republic and serving Eastern Europe. It is paying Warburg Pincus and some members of Zentiva management $515 million for this share. As a result of this deal, SNY becomes Zentiva’s largest shareholder, and its resources will enable further penetration into the central European market. This transaction implies a purchase price of $2.06 billion for a 100% interest in the company, and an adjusted price to revenue multiple of 4.2x.

India’s Ranbaxy Laboratories, Ltd. (BSE: RANB) made three deals in Europe during March. Further down the Danube, it is acquiring  a 96.7% interest in Terapia, S.A., the largest independent generic pharma company in Romania, from Advest International for $324 million. The raw price to revenue multiple is about 4x while the price to EBITDA multiple is 11.6x. This deal adds to the buyer’s existing operations in Romania, which is scheduled to join the European Union in 2007. Seller Advest was advised by Merrill Lynch International.

Ranbaxy’s two other deals did not come with prices, but further the company’s expansion in Europe. From GlaxoSmithKline (NYSE: GSK), it is buying Allen SpA, GSK’s Italian generic business. It is also acquiring Ethimed, one of Belgium’s top 10 generic pharma companies. Ethimed has a portfolio of approximately 20 drugs, and serves the Benelux region. All three Ranbaxy deals are being funded with $400 million the company raised earlier in the year from an overseas bond issue. The company currently derives three-quarters of its revenue overseas, and while in the past it has focused on the U.S. market, it is now putting more of its eggs in the European basket.

Romania was also the destination for another generic company this month. Iceland’s Actavis Group, hf (ISE: ACT) is paying $177.5 million to buy Bucharest-based Sindan, a generic pharma company focused on oncology which currently has 31 products and a development pipeline with 10 product candidates. The raw price to revenue multiple is nearly 2.2x while the price to EBITDA multiple is 8.9x. However, Sindan comes with €14 million in cash on hand, which effectively lowers the purchase price to $160.3 million, and the relevant acquisition multiples to 1.95x and 8.0x, respectively. With a presence in six foreign markets, the Sindan acquisition extends Actavis’ reach into Central and Eastern Europe.

And, no doubt about it, Actavis has its eyes on other game in Central Europe. During mid-March, it launched a preliminary $1.6 billion bid for Croatia’s generic drug maker PLIVA Pharmaceuticals d.d. (LSE: PLVD). The offer values PLVD at $93.41 per share, or a 35% premium to the average share price over the past three months. This bid, however, is worth just 1.3x 2005 revenue. PLVD management has rejected the offer, believing that it does not reflect the company’s true value, and that ACT may be taking advantage of PLVD’s recent results which were somewhat depressed by corporate restructuring activities and charges. PLVD is among the world’s top 12 generic pharma companies while ACT is among the top five; a merger of these two would create a company in the number three spot after Teva and Novartis (NYSE: NVS).

In one other notable European deal this month, Merck & Co. (NYSE: MRK) is acquiring exclusive worldwide rights to a nitric oxide-based technology, which promises to be crucial in developing new antihypertensive drugs, from France’s NicOX, S.A. (PR: COX). Merck will pay as much as $351.4 million, consisting of an $11.2 million upfront payment and up to $340.2 million in milestone payments. The agreement also contemplates royalties on all products arising from the new technology.