The Health Care M&A Monthly: Generic Pharma Consolidates--

Cross-Border Activity Grows To Access Global Markets

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The Pharmaceutical sector continues to generate the highest levels of deal volume and dollars spent in the health care merger and acquisition market. November was no exception, with the announcement of 15 deals worth a combined total of $7.9 billion. Seven of those deals, worth a combined total of $1.8 billion, involved cross-border acquisitions of generic pharmaceutical companies, as buyers seek to gain global scale and tap into promising emerging markets.

These seven initiatives began with companies that are based in what are historically Second or Third World countries, including Hungary, Slovenia and India. Gedeon Richter (PK: GDRB), a large pharma company based in Hungary, has been expanding in Central and Eastern Europe with the acquisition of two generic pharma companies from the investment firm Genefar BV. In the first of these two deals, it is paying $1.3 billion in stock to buy Polpharma, a Polish company that manufactures and markets generic and OTC products. The price to revenue multiple is 3.9x and the price to EBITDA multiple is 13.9x, both on the high side for a generic pharma concern. However, Gedeon’s management believes that relative to her neighbors, Poland spends less per capita on pharmaceuticals and thus represents an opportunity for increased spending on drugs as Poland continues its economic integration into the EU and those Polish plumbers the French fret about so keep sending money back home. With Gedeon’s backing and resources, Polpharma will become the second-largest generic company in Poland. Gedeon is also buying from Genefar an 80.6% interest in Akrihin, a Russian company that manufactures and markets generic and OTC products, for $128.0 million. The price to revenue multiple here is a lower 2.0x, reflecting perhaps a greater risk in Russia. After these two deals close, Genefar will own about 26.75% of Gedeon.

Krka, d.d. (LJ: KRKG), Slovenia’s largest pharmaceutical company, announced its first acquisition with the $142.6 million cash purchase of Germany’s TAD Pharma GmbH from PHW Group, a family-owned business group. With plants in Slovenia, Croatia, Poland and Russia, this deal now allows Krka to tap directly into the Western European market. TAD Pharma manufactures and markets generic pharmaceuticals, with a portfolio of 296 products. The company generates annual revenue of about $87.2 million, 11% of which is derived from exports. The price to revenue multiple is accordingly 1.6x. Since Krka is among the world’s 15 largest generic pharma companies, this deal benefits TAD because its increased size enables it to be more competitive in the fierce German generics market. Further, implementation of recent health care reforms in Germany has taken a toll on the generic pharma industry, one which will be better borne by those companies with an international orientation and vertical integration.

An alliance crafted between India’s Strides Arcolab (BSE: 532531) and South Africa’s Aspen Group (J: APNH), two pharma companies that focus on generics, gave rise to four cross-border deals this month. Though the two have been cooperating since 2003, these four deals give teeth to the alliance. In the largest of them, Aspen is buying a 50% interest in Strides Latina, the Strides subsidiary which sells generic drugs in Brazil (Cellofarm) and Mexico (Solara), for $152.5 million. In 2006, Cellofarm generated revenue of $69.0 million and Solara generated $6.0 million. Strides Latina is establishing two further trading companies in Latin America, Sumifarma and Mexicana, to operate in Venezuela and Mexico, respectively. Aspen has the option to buy, and Strides to sell, the remaining 50% interest in Strides Latina. For its part, Strides is acquiring a 51% interest in Aspen’s Co-pharma, a unit that sells a range of commodity products in the U.K., for about $5.4 million. Strides is also acquiring an 80% interest in Formula Naturelle (Pty.) Ltd., which owns a basket of nutraceutical products currently marketed by Aspen Pharmacare in South Africa. The price here is $5.1 million. Finally, the two companies are forming an alliance to develop and commercialize oncology products through Strides subsidiaries, Powercliff Ltd. and Onco Therapies Ltd. In a deal valued at about $42.8 million, or 2.0x revenue, Aspen is paying $25.75 million for a 50% interest in Powercliff, $16.7 million for a 49% interest in Onco and has the right to acquire a further 1% of Onco for $340,000. This joint venture, Global Oncolytics, will complete the basket of existing capabilities that Aspen has been developing around hormonal and other sterile capabilities. Strides Arcolab will receive about Rs. 3.0 billion in near-term cash flow.

The historic dearth of the capital needed for R&D in these countries has skewed their pharma industries away from developing new branded drugs towards the reverse engineering and manufacturing of generic drugs. And since public health issues tend to loom large in such economies, pharma companies there have concentrated on drugs that serve large populations, rather than specialized niche markets. Finally, these companies have taken advantage of low production costs, particularly in labor, to grow their businesses. Concentrating on lower-cost products such as generic drugs, OTC products and nutraceuticals, as compared with competing branded prescription drugs, tends to favor those companies utilizing retail models, with lower prices and higher volumes. Thus, generic pharma companies seek to expand their selling territories across borders to enlarge their customer bases, particularly in countries where drug prices are not strictly regulated, and to capture market share from higher priced branded pharmaceutical products, even if it is at the expense of big pharma.
 

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