The Health Care M&A Monthly: Abbott Snags Solvay Pharma--

 

Pays $7.6 Billion To Enter Vaccines, Emerging Markets

After several months of intense speculation, the rumors surrounding Solvay Pharmaceuticals’ fate may be put to rest at last. Parent Solvay AG (NYSE-Euronext Brussels: SOLB.BE) has finally found a buyer in Abbott Laboratories (NYSE: ABT). Abbott is paying $7.6 billion to expand in the vaccines and emerging markets, both of which it hopes will be new sources of revenue. Brussels-based Solvay AG is a chemicals and drug conglomerate founded by the Solvay family. In 2008, the company generated revenue of €9.5 billion, cash flow of €885.0 million and net earnings of €449.0 million. Revenue came from three units: plastics generated €3.7 billion (39%); chemicals, €3.1 billion (33%); and pharmaceuticals, €2.7 billion (28%).

Solvay Pharmaceuticals is active in two main therapeutic fields, cardiometabolics and neuroscience, which are supplemented by two niche areas, flu vaccines and pancreatic enzymes. Finally, it includes two other fields where existing products receive management and R&D support, hormone treatment and gastroenterology. Recent consolidation in the pharma industry may have prompted Solvay’s management to ask whether its own pharma operations could remain competitive against much larger companies. Dividing operations would not be an original move: European industry presents us several recent examples of other conglomerates splitting their chemicals and pharmaceuticals units into separate businesses. As the smallest of the three units in terms of revenue, selling off pharmaceuticals seemed the obvious choice. So earlier this year, Solvay decided to divest its pharmaceutical business and use the proceeds to boost its core chemicals and plastic businesses. The market praised this plan, sending Solvay’s stock up by 36% since it made the announcement.

Based in Abbott Park, Illinois, Abbott manufactures and sells a broad range of health care products worldwide. It has four units: pharmaceutical products, diagnostic products, nutritional products and vascular products. On a trailing 12-month basis, it generated revenue of $30.0 billion, EBITDA of $8.4 billion and net income of $5.2 billion. Like many other big pharma companies, Abbott is seeking ways to grow revenue by to expanding in two areas, one therapeutic, the other geographic. ABT hopes to expand into the vaccines market which, while lacking the big margins of prescription drugs, can be a dependable and recurring source of revenue. Just witness the drugmakers currently falling over themselves to prepare vaccines for the seasonal flu and H1N1 “swine flu” virus. And, Solvay Pharma brings to ABT new drugs for hypertension and Parkinson’s disease. ABT also wants to expand its footprint outside the U.S. The Solvay acquisition fits the bill, enlarging ABT’s presence in Eastern Europe and Asia where Solvay Pharma is well established.

Under terms of the deal, ABT is to pay €4.8 billion upfront in cash. It has also committed to paying an additional €300.0 million between 2011 and 2014 if the pharma unit achieves certain business targets. Finally, ABT is assuming $584.0 million in liabilities. This brings the entire purchase price to approximately $7.6 billion.

The deal is valued at 1.95x 2008 revenue. While this multiple is more characteristic of what can be fetched for a generic pharma business, it should be noted that Solvay Pharma’s drug portfolio is a mature one. As their patent protection expires, these drugs face generic competition in the not-distant future, and this valuation appears to be taking that factor into account. Perhaps enticed by ABT’s offer of ready cash, Solvay’s management decided to accept the deal, the valuation and the money.

Not that there weren’t other suitors for Solvay Pharmaceuticals. According to widely circulated reports, the Swiss firm Nycomed had put together an offer of $5.8 billion, including the financial backing. However, Nycomed’s backers, including the private equity group Nordic Capital and the buyout arm of Credit Suisse Group, may have counseled prudence, resulting in an offer that was lower than the one ABT was able to muster. After all, ABT could draw on its healthy cash flow to swing the deal, while Nycomed’s PEG investors would have to pony up more of their own capital. As we have seen before, in what boils down to essentially a contest between a strategic buyer and a financial buyer, the strategic buyer seems to prevail more often than not, at least in this market.

Barclays Plc’s investment bank provided Abbott Laboratories with financial advice in this deal; Morgan Stanley, Citigroup and NM Rothschild & Sons provided Solvay AG with similar advice.

Who’s Next?
As we observed above, the Abbott-Solvay deal is not the first to result from the radical restructuring of a chemicals and pharmaceuticals conglomerate. Europe’s big pharma community is chock-a-block with examples of companies that have gone down this time-honored path, most notably AstraZeneca plc (NYSE: AZN), Novartis AG (NYSE: NVS) and Sanofi-Aventis SA (NYSE: SNY). The big question is, Who’s next?

We find ourselves wondering whether the announcement of a new CEO at Bayer AG (DE: BAYG) may signal a change in the company’s corporate structure that could involve separating its chemicals and pharmaceuticals units, leaving Bayer Healthcare as an independent company. What makes us entertain this scenario—however speculative it may be at this point—is that Bayer has broken with tradition by going outside of the company to hire its incoming CEO. Marijn Dekkers, a Dutchman and currently CEO of Thermo Fisher (NYSE: TMO), has been tapped to take over Bayer in October 2010 when Werner Wenning steps down. Dekker’s impressive record as a dealmaker at TMO could well presage a major restructuring of Bayer as a pure-play pharma company by spinning out its various chemicals, crop products and plastics businesses. We’ve got an entire year to ruminate over this one.