The Health Care M&A Monthly: Hostilities Erupt On Two Fronts--

Hostile Deals Emerge In Pharma And CRO Sectors

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As we have seen over the past six months, the current economy, particularly with a much-contracted credit market, has favored strategic buyers over financial buyers in the health care merger and acquisition market. One unanticipated side-effect of this shift towards strategic buyers is the increase in hostile dealmaking, with several strategic bidders bidding on a single target. Without the spectre of a massively endowed private equity firm swooping in with a debt-heavy LBO to scoop up some choice prize, strategic buyers now feel freer to enter the M&A market, either to make an unsolicited bid for a company or to make a hostile counterbid to poach some company that is already involved in a deal.

The current economic environment also promotes the increase in hostile dealmaking in another way. If a company has to be on the ball when times are flush, it has all the more reason to redouble its efforts to remain competitive when sailing through tough economic straits. And remaining competitive often means making a deal in which you simultaneously acquire a vital asset and deny it to your competitors. A number of hostile deals emerged in June that illustrate these rationales: two involve generic pharmaceutical companies while two others involve contract research organizations, or CROs.

Generic Pharma—Mitteleuropa

Zentiva N.V. (LSE: ZEND, PSE: ZNTVsp), a generic pharma company, has been approached by an affiliate of the Dutch financial group PPF N.V., Cyprus-based Anthiarose Ltd., with an unsolicited buyout offer. On May Day, Anthiarose announced it would pursue the takeover of ZEND. Incorporated in the Netherlands, headquartered in the Czech Republic and operating in Central and Eastern Europe, Zentiva develops, manufactures and markets generic drugs. It has leading positions in the Czech, Turkish, Romanian and Slovak markets and is an important player in the Central and Eastern European regions. In 2007, ZEND generated revenue of $630.0 million, EBITDA of $228.0 million and net income of $91.0 million. In May 2007, ZEND entered the Turkish pharma market with its $606.2 million acquisition of a 75% share in Eczacibisi Generic Pharmaceuticals, the country’s fourth-largest generic firm.

In mid-June, Anthiarose/PPF made good on its proposal by issuing a formal offer to pay CZK 950 ($61.10) per share, or approximately $2.3 billion, for Zentiva. The two parties are not strangers: PPF and its affiliates currently own a 19.2% stake in Zentiva, which is up from a 15.3% holding at the end of 2007. This price yields acquisition multiples of 3.65x revenue and 14x EBITDA. Unenviably for shareholders though, the bid represents an 8.7% discount to the price of ZEND’s stock the day before the formal offer was made and a slim 1.9% premium to its price in early May, when the original interest was announced.

Accordingly, Zentiva’s board engaged Merrill Lynch International to help it determine whether the Anthiarose/PPF offer is fair from a financial point of view. While the board views the timing of the offer as opportunistic, coming when Zentiva’s stock happens to be down, one cannot fault Anthiarose for striking while the iron is hot. Stronger counterarguments can be made against this bid, however. A review of recent comparable sales in Europe revealed a median premium of 26.2% paid for generic pharmaceutical companies. Also, the EBITDA multiple clearly fell at the low end of the peer-group valuations and seemed to overlook the full financial impact of Zentiva’s acquisition of Eczacibisi. Supported by Merrill’s opinion, the board unanimously rejected the bid.

In the meanwhile, sanofi-aventis (NYSE: SNY), which acquired a 24.9% stake in Zentiva in 2006 for $515.0 million, announced plans to make its own counteroffer of CZK 1,050 per share, or $2.57 billion. Although 11% higher than the Anthiarose/PPF deal, SNY’s bid strikes us as falling a tad short of those ideal acquisition multiples cited in the Merrill Lynch comparable sales analysis. While SNY claims a “strong strategic rationale” (logique stratégique forte) to pursue this tie-up, the relatively modest premium it is offering suggests a degree of caution and, perhaps, some curiosity over whether PPF will up the ante or fold. At press time, a formal offer from SNY is still forthcoming. ZEND’s board has scheduled a meeting in the Netherlands for July 9 to discuss PPF’s offer and others that may emerge.

Generic Pharma—India

Daiichi Sankyo (T: 4568), Japan’s second-largest pharmaceutical firm by sales, has made an offer of up to $4.6 billion to acquire a 54.8% stake in Ranbaxy Laboratories (BO: RANB). Ranbaxy is India’s largest pharma company by sales, specializing in generic drugs. On an annualized basis, RANB generates revenue of $927.4 million and EBITDA of $158.1 million. This deal implies a purchase price of $8.5 billion for a 100% interest in RANB. As currently structured, the deal is to take place in two parts. Under the first, Daiichi will pay Rs 737 per share to the Singh family for their 34.8% interest; under the second, mandated by Indian law, it will make an open offer for up to a further 20% of the stock. The first part offers the Singhs a 31.4% premium to the stock’s prior-day price. The acquisition gives Daiichi a strong footprint in the emerging market drug industry. It also gives the company a very strong position in generic drugs, which it may wish to promote in Japan where generic drug usage is about 17% of volume (compared to the United States with 63%).

With the Zentiva-PPF-sanofi battle as a backdrop, Daiichi’s plan to acquire Ranbaxy stirred up a hornet’s nest of speculation that Pfizer (NYSE: PFE) would step in with a counteroffer for Ranbaxy. One Indian paper opined PFE would go for a 65% share of the company; after all, Pfizer definitely has the cash to make a superior offer, and observers noted PFE was already talking with RANB. What emerged from those talks, however, was something quite different. The two companies struck an agreement for RANB to delay by at least five months the introduction of its generic version of Lipitor into the U.S. market. This understanding would secure for PFE about $5.0 billion in revenue—$1.0 billion per month—from Lipitor that would otherwise have been vulnerable to RANB’s copycat version. In return, PFE is not offering cash, but will no longer pursue legal challenges against RANB in several jurisdictions. As the dust settles on this one, we believe that PFE has gotten what it wants from talks with RANB, and will not seek a takeover of the company. Anyway, Daiichi’s bid seems to be fairly priced, and unlike PPF’s low-ball offer for Zentiva, offers little wiggle room for counterbids.

CROs

Parexel International (NASDAQ: PRXL) is jockeying with Quintiles Transnational for Clinphone plc (LSE: CNP), a self-styled Clinical Technology Organization, or CTO, involved in developing clinical trial technology. PRXL is offering $177.0 million, or 2.1x revenue, for CNP. This deal offers CNP shareholders a 31% premium to the stock’s prior-day price and an 86% premium to its price on February 14, the day before PRXL first announced its interest in CNP. This deal will strengthen PRXL’s operations with the target’s sophisticated technology solutions for clinical trials. PRXL has arranged a $300.0 million facility with JPMorgan Chase Bank and Keybank National Association to fund the acquisition and related costs. As we go to press, competitor Quintiles, based in Research Park Triangle, North Carolina, is exploring the possibility of making an enhanced counterbid, so stay tuned.

In a smaller deal, Kendle International (NASDAQ: KNDL) is paying $23,578,000 in upfront and earnout payments to acquire DecisionLine Clinical Research, a Canadian CRO with a state-of-the-art, 82-bed medical facility. Based in the ethnic melting pot of Toronto, DecisionLine has access to a genetically diverse population, enabling it to conduct trials requiring diversity with ease. This acquisition is also in line with the company’s strategic emphasis on early-stage exploratory trials. Valued at 1.2x revenue, it enlarges KNDL’s capacity to perform phase I clinical trials, an area which across the industry is showing greater growth than more advanced trials. In a conference call covering the transaction, KNDL’s management noted that word of its plan to buy DecisionLine had brought several worthy and assertive competitors out of the woodwork, so they were happy to have won the prize.
 

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