The Health Care M&A Monthly: Glaxo Goes On A Buying Spree--

New CEO Makes His Mark By Making Deals

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The world’s second-largest drug maker, GlaxoSmithKline (NYSE:GSK), acquired a new CEO this year, Andrew Witty. Since coming on board in the second quarter, Mr. Witty’s Glaxo has averaged better than one acquisition per month. Through September, GSK announced seven deals, five in biotechnology and two in pharmaceuticals, worth a combined total of $7.7 billion.

In October, Glaxo announced four acquisitions worth a combined total of $987.0 million, with two in biotech and two in pharma. In the largest of these four, GSK has acquired exclusive rights from AFFiRiS GmbH to develop and commercialize its vaccine programs, aimed at treating Alzheimer’s disease. Based in Vienna, Austria, AFFiRiS’ program, currently in Phase I, treats Alzheimer’s by targeting beta-amyloid. Glaxo has committed up to $550.0 million to pay for this deal, including $28.8 million in an upfront payment to AFFiRiS. With milestone payments, the total value could rise to $550.0 million. Royalties on sales of products developed from the collaboration are also stipulated in the agreement. The concept behind AFFiRiS’ program is a technology that allows the design of proteins with very specific binding characteristics. Such proteins are well-suited for developing vaccines against disease-causing "rogue" proteins, such as beta-amyloid which has been strongly implicated in Alzheimer’s disease. This technology has the potential as an adjuvant to deliver more effectively innovative vaccines capable of inducing immune responses. The acquired program is to become part of GlaxoSmithKline Biologicals.

Focused still on vaccines, GSK’s second October deal involves its $57.0 million acquisition of Genelabs Technologies (NASDAQ: GNLB) in Redwood City, California. Genelabs develops therapies to treat infectious diseases; it is currently focused on therapies for the hepatitis C virus. On a trailing 12-month basis, the target generates annual revenue of $15.7 million and a net loss of $6.4 million. The transaction is thus valued at 3.6x revenue. Worth approximately $1.30 per share, it offers GNLB shareholders a premium of about 550% to the stock’s prior-day price of $0.21. Current treatment protocols in this therapeutic space have a relatively low efficacy and invite innovative treatments; the current gold standard therapy includes peglyated-alpha interferon plus ribavirin. Their efficacy rate is only 50% and both have significant side effects. The target company is to become part of GSK’s Drug Discovery unit.

Still in California, but moving into pharmaceuticals, GSK is acquiring the Biotene oral care business from privately held Laclede for $170.0 million. This line includes a variety of treatments and formulations for xerostomia, or dry mouth. This business generated revenue of $50.0 million in 2007, with two-thirds coming from the U.S. market. Hence, the deal is valued at 3.4x revenue. This acquisition bolsters GSK’s consumer health care unit, specifically its oral care portfolio, which currently includes toothpastes, denture care products and other treatments. While the price to revenue multiple strikes us as a tad on the high side for a consumer health product, GSK has in the past met fierce competition from other big pharma companies in its attempts to bulk up its consumer health care unit through acquisitions, so it may have paid something of an extra premium to nail this deal down.

Glaxo’s fourth deal involves the acquisition of Bristol-Myers Squibb’s (NYSE: BMY) Egyptian pharmaceutical business for $210.0 million. The portfolio includes 20 branded products in four therapeutic areas, which in 2007 generated revenue of $48.5 million. This deal, valued at 4.3x EBITDA, reflects Mr. Witty’s interest in entering emerging markets, particularly the Middle East and North Africa. (However, Mr. Witty still has a fondness for the U.S. market: five of his eleven transactions so far have been in California, with two more in Massachusetts.) With this transaction, GSK becomes the leading pharmaceutical company in Egypt with a market share of 9%. The pharmaceutical market in Egypt is estimated to be worth $2.1 billion, and it grew by 19% last year.

As illustrated by this month’s activity, the different deals Mr. Witty has been undertaking are intended to diversify risk across therapeutic areas and spread it into new markets. The company’s vaccine business, in particular, is offsetting some of the revenue erosion experienced by some of GSK’s more mature prescription drugs. In its third quarter earnings announcement, the company noted, "It is alert to potential acquisition opportunities as the turbulent market conditions have led some businesses to sell off assets." Transactions going forward will, according to Mr. Witty, be "small to medium." GSK’s commitment to acquisitions was reaffirmed mid-October when the company said it would curb share buybacks to give it more room and cash for making acquisitions.
 

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