The Health Care M&A Monthly: CSL Buys Talecris Biotherapeutics--

Pays $3.1 Billion To Bolster Plasma Derivatives Business

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The largest deal to be announced in August reflects several current trends in the health care M&A market. It shows us how the biotech industry is broadening to include relatively "low-tech" solutions and products. It illustrates the recent increase in foreign buyers of companies in the U.S. domestic market. And it demonstrates how the M&A market may serve as an exit strategy for companies who in better times might have chosen the now-dormant IPO market.

Mid-month, CSL Ltd. (ASX: CSL) announced plans to acquire Talecris Biotherapeutics Holdings Corp., a privately held company that manufactures blood plasma products for a variety of therapeutic uses. CSL is offering $3.1 billion to buy Talecris so it can expand its own plasma derivatives business. Based in Melbourne, Australia and operating in 27 countries, CSL develops and manufactures vaccines and plasma protein biotherapies. Its product offerings include pharmaceuticals, vaccines, plasma-derived therapies, antivenoms and diagnostic products. One of its best-known products is Gardasil, a vaccine against human papillomavirus, which is licensed to Merck (NYSE: MRK) and is sold in Europe by Merck and sanofi-aventis (NYSE: SNY). For the fiscal year ended June 30, 2008, CSL generated revenue of A$3.8 billion, EBITDA of A$1.1 billion and net profit after tax of A$702 million. Out of the year’s total revenue, CSL subsidiary CSL Bioplasma, which handles plasma derivatives, generated revenue of A$253.0 million.

CSL currently competes against a cohort that includes America’s Baxter International (NYSE: BAX), Spain’s Grupo Grifols and Switzerland’s Octapharma. As observed in last month’s issue, the exchange rate of the U.S. dollar is tending to favor foreign buyers over domestic. From a strategic perspective, the acquisition of Talecris would significantly enlarge CSL’s plasma derivatives business, and enhance its ability to service customers in the U.S., Canada and Germany, where it already carries out significant operations.

Based in Research Triangle Park, North Carolina, Talecris is a vertically integrated company that collects blood plasma and then manufactures a number of therapeutic products from that plasma. To serve its international clientele, it also has regional headquarters in Toronto (it is the major provider of such products in Canada) and Frankfurt, which services its historical base in Germany and the rest of Europe. The company currently operates 56 plasma collection centers and two manufacturing facilities, one in Clayton, North Carolina, and the other in Melville, New York. The company’s therapeutic products include human albumin and therapies for hemophilia, antithrombin III deficiency, hyperimmune globulin disorders and immune deficiencies, among others. For the 12 months ended June 30, 2008, Talecris generated revenue of $1.24 billion and EBITDA of $258.0 million.

Talecris was formed in late 2004 with the backing of two private equity firms, Cerberus Partners, LP, based in New York, and Ampersand Ventures, based in Massachusetts. Specifically, Talecris was organized to buy out the plasma products unit of Bayer AG (DE: BAYG), which was then trying to reposition its business in the wake of the Baycol/Lipobay recall and ensuing corporate debacle. Bayer’s plasma unit included products for treating immunodeficiency disorders and congenital pulmonary emphysema. At the time, the unit was generating annual revenue of about $641.0 million. The purchase price then was $590.0 million in cash, for a price to revenue multiple of 0.92x. In addition to providing financing, Cerberus also contributed the managerial talents of Larry Stern, who became Talecris’ CEO in April 2005. Since then, Talecris has grown both organically and through acquisition. Its Talecris Plasma Resources collection subsidiary has acquired a number of plasma collection centers. In November 2006, International BioResources sold the majority of its plasma collection centers to Talecris for $135.0 million, or 1.6x revenue. The company acquired several more centers, including some in development, from the same seller in June 2007 for $16.3 million. As not-for-profits, such as the American Red Cross, withdrew from the plasma collection industry, a handful of for-profits have come to dominate the market, and Talecris has taken advantage of this realignment within the industry to expand operations.

Once revenue levels broke the billion-dollar ceiling, Talecris’ financial backers began looking in earnest for an exit strategy to recoup their investment and make some money for investors. To fund its frenzied growth, the company had undergone a debt recapitalization in December 2006, becoming more leveraged, and it sought a way to deleverage so it could direct cash flow to operations rather than paying down debt. Accordingly, an S-1 was filed with the SEC on July 27, 2007 with the goal of raising $1.0 billion and listing its stock on the Nasdaq exchange under the symbol TLCR. During the subsequent 12 months, however, little progress was made in the unresponsive IPO market. That paralysis ended in August 2008 when Talecris, Cerberus and Ampersand got a better offer from CSL.

To fund this $3.1 billion deal, CSL intends to raise $1.5 billion through an institutional share placement, to be arranged by Merrill Lynch, and then to raise $1.6 billion in debt to complete the transaction. At 2.58x revenue and 12.0x EBITDA, most analysts believe that this offer is fully priced, so a bidding war is not expected. The low price to revenue multiple—low for a biotech company—indicates that Talecris comes from the low-tech end of the biotechnology scale. In this respect, plasma derivatives resemble many vaccine manufacturers: both are lower margin biotechs which are attractive because of their profitability and steady cash flow. But even with its lower margins, the plasma derivatives business may yet produce better-than-expected returns over the next few years. The supply of plasma has actually decreased: from 2000 to 2005, worldwide plasma collections declined from 19.4 million liters to 18.0 million liters. With demand for plasma products growing at an annual compound rate of 7% for the past 15 years, the scene is set for basic economic principles to kick in and increase prices, revenue and returns on investment.