The Health Care M&A Monthly: Warner Chilcott Expands
Pays $3.1 Billion For P&G’s Global Pharma Business
Despite any claims you may hear to the contrary, size does matter in the Pharmaceutical industry. Whether it’s the size of your drug portfolio, market share or revenue, considerations of size and scale motivate strategic players in the business, influencing what kinds of deals they will undertake. But size is also relative. So while one player may decide to divest certain operations because they lack the scale at which the company feels it can effectively compete, another player may view those unwanted assets asjust the thing it needs to gain additional clout in the market place. In August, the Pharmaceutical merger and acquisition market presented us with just such a deal.
Procter & Gamble (NYSE: PG) decided that for a company of its size, it could not compete meaningfully in the prescription drug business, and so moved to sell its global pharma business to concentrate on its larger consumer health business. PG manufactures and sells consumer goods worldwide, concentrating on the three areas of beauty, health and well-being, and household products. Among its better known brands are Crest toothpaste and Tide detergent. After it concludes the sale of its prescription drug unit, the company’s health and well-being division will focus on personal health care, oral care and feminine care. On a trailing 12-month basis, PG generated revenue of $79.0 billion, EBITDA of $19.2 billion and net income of $11.1 billion.
Procter & Gamble’s experience in the prescription drug industry has been a mixed bag at best. In 2000 it tried to gain a major foothold in the pharma business by means of a three-way deal with Warner-Lambert and American Home Products; however, it ultimately abandoned that scheme. Pfizer (NYSE: PFE), it will be remembered, won Warner-Lambert and its blockbuster drug Lipitor. Finding little success in the acquisition market, PG had to be content with a modest stable of drugs and alliances. The portfolio for sale includes drugs to treat ulcerative colitis (Asacol), osteoporosis (Actonel) and co-rights to a treatment for overactive bladder (Enablex). For the year ended June 30, 2009, this business unit generated revenue of $2.3 billion and net income of $540.0 million. However, PG has also had to defend its branded drugs against the predations of generic pharma companies; it went to court (and won) against TevaPharmaceutical’s (NASDAQ: TEVA) attempt to duplicate its Actonel osteoporosis drug. Yes, the unit has been profitable, but is it worth all the aggravation? Apparently not, since late last year PG put its global pharmaceutical business on the auction block in a process led by Goldman, Sachs.
Warner Chilcott plc (NASDAQ: WCRX) emerged from the auction as the winning bidder. WCRX is a specialty pharma engaged primarily in the women’s health care and dermatology segments. Although the company is based in Ireland, most of its revenue derives from its business in the United States. On a trailing 12-month basis, WCRX generated revenue of $971.0 million, EBITDA of $536.0 million and net income of $24.0 million.
This acquisition will be transformative for Warner Chilcott, increasing the company’s annual revenue by more than a factor of two. The deal turns it from a relatively local business into a global pharmaceutical company and expands its presence in women’s health care. It also serves to establish WCRX in the urology market in advance of the anticipated launch of its erectile dysfunction treatment. Finally, this transaction adds gastroenterology to the company’s therapeutic mix.
Under terms of the deal, WCRX is paying $3.1 billion in cash, which yields acquisition multiples of 1.35x revenue and 5.75x net income. The relatively low price to revenue multiple, at least for prescription drugs, may be attributed to two factors: one legal, the other financial. PG has a lawsuit pending against a company it alleges is making a knock-off of one of the drugs being sold. Even though PG may well prevail, having an asset embroiled in a lawsuit is not a selling point and it likely shaved some basis points off of the multiple. Also, limitations on the availability of financing may have helped to tamp down the purchase price. As noted below, putting together the financing for this deal was daunting in the current credit crunch. Other bidders may well have promised more, but ultimately WCRX was able to line up the financing and deliver. Motivated to sell and not to prolong the process, PG accepted the cash.
Six banks are expected to put up as much as $4.0 billion in financing, roughly $3.0 billion for the acquisition and the remainder to finance WCRX’s existing debt. Led by J.P. Morgan Chase and Bank of America, they include Credit Suisse, Citigroup, Barclays and Morgan Stanley. This is the fourth-largest “leveraged loan” of 2009 in the U.S., and the largest worldwide this year for an acquisition. A leveraged loan is one made to a borrower who already carries a significant amount of debt or whose credit rating is below investment grade. That these banks are willing to undertake this kind of loan—though no single bank was willing to go it alone—suggests that this corner of the credit market may be thawing and similar packages may be available for other buyers near term.
Apparently, other financial and strategic buyers, including Cerberus Capital Management and Forest Laboratories (NYSE: FRX), were also interested in the PG unit. However, they deemed it prudent to await the outcome of the patent dispute before taking the plunge. PG has a case pending against Roxane Laboratories, a unit of Germany’s Boehringer Ingelheim, over a copycat version of PG’s Asacol colitis drug. So they both demurred. In the end, this deal dramatically increases Warner Chilcott’s size and heft in the pharma industry, but barely affects the overall scope of PG’s operations. J.P. Morgan Securities and Morgan Stanley provided WCRX with financial advice on this transaction; Goldman, Sachs provided PG with similar advice.