The Health Care M&A Monthly: Focus on Family Pharma -

Three Family-Owned European Drug Firms Sell In One Week

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Dealmaking in the Pharmaceuticals
sector, as well as reporting on it, has often focused on two extremes: the merger of mega-pharma conglomerates at one end and the consolidation of generic pharma companies at the other. Often neglected is the role that medium-sized companies play in the merger and acquisition market. Three deals announced in September show how some second-tier drug firms are responding to pressures from both ends by selling off operations. All three are based in Europe, and all three are family-controlled.
In the largest of the three transactions, the German chemical and pharmaceutical company Merck KGaA (DE: MRCG) is acquiring Serono, SA (NYSE: SRA) for approximately $13.3 billion. Though publicly traded, both these firms are family-controlled: 73% of MRCG is owned by the Merck family while 64.5% of SRA is owned by the Bertarelli family.
This combination should come as no surprise since both companies have been actively prowling the M&A market. Our readers will recall that Merck had sought to bulk up by buying Schering AG, but ultimately lost out to Bayer AG’s (NYSE: BAY) $21.5 billion bid. Further, SRA has been seeking new suitors ever since GlaxoSmithKline (NYSE: GSK) and Novartis (NYSE: NVS) took a look earlier this year but walked away.
Based in Darmstadt, Merck KGaA’s chemical and pharmaceutical operations generated 2005 revenue of €5.9 billion. Merck sells the Erbitux cancer treatment outside the United States. Not only did MRCG lose Schering, it also abandoned its Sarizotan treatment for Parkinson’s disease in late-stage clinical trials, so it needs new products and sees potential in SRA’s portfolio and development pipeline.
Serono is a biotech firm involved in therapeutic products that focus on reproductive health, neurology and metabolism. Among its eight drugs on the market, the Rebif treatment for multiple sclerosis is a best seller; the company also has several cancer treatments in development. On a trailing 12-month basis, Serono generated revenue of $2.7 billion, EBITDA of $1.7 billion and net income of $548 million.
Merck has offered to pay the Bertarelli family CHF 1,100 for each share of its 64.5% holding and will offer other shareholders the same deal. This transaction offers shareholders a 20% premium over the stock’s prior-day price. It works out to a purchase price of $13.3 billion, which yields the acquisition multiples of 4.9x revenue and 7.8x EBITDA. The price-to-revenue multiple is higher than the 3.4x that Bayer paid for Schering, but biotechs do tend to command somewhat higher revenue multiples than traditional drugmakers.
If completed, this transaction will make Merck Europe’s largest biotech firm and expand its pipeline. It will also expand its pharmaceutical sales, bringing it closer to Boehringer Ingleheim, Germany’s second-largest drugmaker. Goldman Sachs advised the Bertarellis on this deal. CEO Ernesto Bertarelli will likely use part of the proceeds to help fund a defense of his 2003 victory in the America’s Cup yacht race, to take place in Valencia next year. To give Mr. Bertarelli his due, the Harvard-educated executive is more than a dilettante playboy; since taking over the reins of the company from his father ten years ago, he has grown the business from $500 million a year to its current $2.7 billion. Ahoy, matey! Good sailing.
The second-largest deal in this group also involves a German chemical and pharmaceutical company, but this time as the seller. Altana AG (NYSE: AAA) is selling its Altana Pharma AG division to Denmark’s Nycomed Pharma Holding AS in a deal valued at $5.7 billion.
Nycomed, which is owned by a consortium of private equity companies that includes Nordic Capital, CSFB Private Equity, The Blackstone Group and NIB Capital Private Equity, is involved in specialist and prescription pharmaceuticals, as well as consumer health products. It currently distributes Altana’s top-selling drug, Pantoprazol for the treatment of ulcers, in Scandinavia and Belgium. In 2005 the company generated revenue of €748 million. By pharmaceutical standards, it is a relatively small firm but with backers of this calibre, you can be sure that it has set its sights on aggressive growth.
Altana Pharma AG concentrates on pharmaceutical products in therapeutics, imaging (contrast media) and OTC medication. In 2005 it generated revenue of €2.4 billion. The divestment of the smaller pharmaceutical business will allow Altana AG to concentrate on its larger specialty chemicals business line, Altana Chemie AG. Susanne Klatten, daughter of former BMW magnate Herbert Quandt, will remain Altana’s majority shareholder after the deal closes.
Nycomed is paying $5.7 billion, or 1.88x 2005 revenue for Altana Pharma. The combined company is projected to generate annual revenue of $3.9 billion. This combination will pair Nycomed’s marketing experience in Scandinavia and the former Soviet Union with Altana Pharma’s presence in larger European countries and South America.
In the third-largest transaction of this cohort, Belgium’s UCB, SA (BRU: UCBBt) is acquiring Germany’s Schwarz Pharma AG (DE: SRZG) in a transaction valued at $5.6 billion. UCB transformed itself from a traditional chemical-pharmaceutical company into a biotech concern when it bought Celltech in 2004 for $2.7 billion, then sold off its chemicals division. The company now concentrates on drugs for cancer, inflammation and allergies. In 2005 UCB generated revenue of €2.3 billion.
Based in Monheim, Germany, Schwarz Pharma manufactures drugs for epilepsy, Parkinson’s disease, bladder control and cardiovascular disease. It achieved a certain fame from sales of its generic version of AstraZeneca’s (NYSE: AZN) anti-ulcer drug Prilosec. The company has two late-stage projects, one of which, Fesoterodine, is being developed in partnership with Pfizer (NYSE: PFE). In 2005 Schwarz Pharma generated revenue of €991 million; however, the company hasn’t turned a profit since 2003 when it made almost $1 billion from sales of its generic version of Prilosec.
Under terms of the agreement, UCB will pay €50 in cash and issue 0.8735 shares of its common stock for each share of SRZG, valuing SRZG at €91.10 per share. The Schwarz family, which owns 60% of the stock, is voting in favor of the deal, as are Schroders Investment Management Ltd. and Capital Research and Management, which together hold nearly 7.9% of Schwarz Pharma. The deal offers shareholders a 20% premium over the stock’s prior-day price.
The combined company will have annual revenue of about $4.2 billion and a yearly R&D budget of $987 million, giving it the necessary financial leverage to push Schwarz’s two late-stage drugs onto the market and expand their usage. Under terms of the deal, the Schwarz family will retain at least 41.5% of its UCB shares until after June 2010, so the family should remain active in at least the short term. Rothschild advised Schwarz Pharma in this deal while Braveheart Investment Group advised UCB.
All three deals appear to be responses to market forces that are squeezing the second-tier drug companies. On the one hand, they face price competition from the large generic firms who can undercut their branded drugs. On the other hand, they also face competition from the big pharma companies whose drug portfolios, marketing coverage and deep pockets give them a sizable advantage in developing (or buying) new drugs and bringing them to market. Second-tier drugmakers are not as generously endowed to match big pharma’s R&D budgets or their sales, marketing and distribution campaigns, and are consequently more sensitive to cost constraints.
While each of these deals has its specific rationales, with the market consolidating, this set of general factors has led the second-tier companies to the M&A market while they are still attractive acquisition candidates. The companies and their management are to be applauded for meeting these challenges proactively, rather than waiting to find themselves and their fortunes in dire financial straits as market forces cap their top line and erode their bottom line. We also suspect that since the sellers involve individual families, they are more risk-averse to the looming uncertainties of the drug industry and its ongoing consolidation than purely corporate entities would be; it is, after all, their money on the line, not someone else’s.
 

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