In the March
2005 issue:
Size Does Matter: Pharmaceutical Industry
Consolidation Continues
Two billion-dollar deals were
announced in the Pharmaceutical sector. In a bid to become the world’s
largest generic pharma company, Novartis is buying two related companies
for $8.4 billion. To beef up their R&D budgets, two more Japanese pharma
companies are joining forces in a deal worth $7.8 billion.
...
Specialty Pharmacy Company
Targeted in $2.5 Billion deal
To secure its position as the leading PBM and broaden its services to
include specialty pharmacy, Medco Health Solutions is buying Accredo
Health in a deal worth $2.5 billion. p1
...
The Month in Deals
A total of 68 deals were announced over the past four weeks. Based on
revealed prices, a total of $21.23 billion was committed to finance them.
p4
...
In The Departments
Deal Summaries p5
Additional Transactions p10
Transaction Updates p11
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Read more about
The Health Care M&A Monthly. Read the past
headlines.
Companies mentioned in this issue:
A
Accredo Health p1
ACTRA Rehabilitation Services p14
AdvancePCS p1
Amedisys p11
Andrx Corp. p16
Apria Healthcare Group p11
Ardent Health Services p4
Asset Real Estate & Investment Co. p13
Associated Administrators p13
Atos AB p16
Attentus Healthcare p12
Avalon Pharmaceuticals p16
B
Banc of America Securities, LLC p16
Baptist Hospital p4
Baptist Medical Equipment p4
BASF AG p2
Behrman Capital LP p13
Benchmark Medical p14
Biocompatibles International p14
BioScrip p12
Blue Cross and Blue Shield of Delaware p13
Boston Scientific p16
C
Canyon Creek Development p13
CapitalSource p13
Cardiac Science p16
Caremark Rx p1
Carolinas HealthCare System p13
Caruso Benefits Group p13
CellMed p14
Chemed p12
Chicago Trail Village p13
Christiana Care Health System p13
Chronimed p12
Citigroup p4
CLOSURE Medical Corp. p15
Community Health Systems p12
Cyberonics p16
CyVera Corporation p14
D
Daiichi Pharmaceutical Co. Ltd. p3
Dainippon Pharmaceutical p3
Dialysis Corporation of America p12
Dr Reddy Laboratories p2
E
Eon Labs p1
ER Urgent Care Centers p14
Esoterix p13
Essent Healthcare p12
Ethicon p16
ExpressScripts p1
F
First Horizon Pharmaceutical Corp. p16
Fisher Scientific p16
Fujisawa Pharmaceutical p3
G
GMS Group, LLC p13
Goldman Sachs p3
Greene County Memorial Hospital p12
H
Hamilton Communities p13
Hamlet Retirement Community p13
Harvard Pilgrim Health Care p13
HCA p13
HCR Manor Care p14
Health Plans p13
HealthShare Technology p15
HealthSouth p14
HealthSouth Surgery Center of Norwalk p14
Hexel AG p1
Hospice of Greater Pittsburgh Comfort Care p12
I
Idun Pharmaceuticals p14
Illumina p14
J
J.P. Morgan Chase & Co. p13
Johnson & Johnson p15
Jupiter Medical Center p11
K
killed Care Pharmacy p14
Kindred Healthcare p14
King Pharmaceuticals p16
KNBT Bancorp p13
L
Lakeview Community Hospital p12
Lawrence County Healthcare Authority p12
Lek, DD p2
M
Magellan Health Services p4
Manorhouse Retirement p13
Marcus & Millichap p13
Matria Healthcare p15
Medco Health Solutions p1
Medicore p12
Merit Behavioral Care p4
Merrill Lynch & Co. p3
Merrill Lynch Japan p3
Miavita p15
Micro Medical p16
Mid-Atlantic Health Plan p13
MIM Corp. p12
Mylan Laboratories p16
N
National Medical Health Card Systems p14
NDCHealth Corp. p15
NeighborCare p14
Nexia Biotechnologies p15
Nomura Securities p3
Nordic Capital p16
North Arundel Hospital Association p11
Northeast Medical Center p12
Norwalk Hospital Association p14
Novartis AG p1
O
Oakdale Heights Management Corp p13
Omnicare p14
Oxford Instruments p16
P
Park Place p13
Pediatrix Medical Group p14
Perbio Science p16
Pfizer p14
Pharmaceutical Care Network p14
PharmAthene p14
Psychiatric Solutions p4
Q
Quest Diagnostics p13
Quinton Cardiology p16
R
Regence BlueCross BlueShield p13
S
Sabex Holdings p2
Sankyo Co. p3
Skilled Healthcare Group, Inc. p14
Spartanburg Assisted Living Retirement Center, LLC p13
Stada Arzneimittel p2
Stryker Corp. p16
Sumitomo Chemical p3
Sumitomo Pharmaceuticals Co. p3
Sunbury Community Hospital p12
T
Takeda p3
Teva Pharmaceuticals p2
The Blackstone Group, LP p15
The Colonnade p13
The Sanger Clinics p13
The Strong Funds p13
Total I Imaging p13
TransForm Pharmaceuticals p16
Troy Regional Hospital p12
U
UBS Investment Bank p16
Universal Health Services p4
V
Vertex Pharamceuticals p16
Viasys Healthcare p16
Visiting Nurses Association of Florida p11
VITAS Healthcare p12
W
WebMD p15
William Blair & Co. p14
Wood River Village p13
Y
Yamanouchi Pharmaceutical p3 |
The
Health Care M&A Monthly
Size Does Matter: Pharmaceutical Industry
Consolidation Continues
Frankly, since the beginning of the
year we had been fretting about the
absence of billion-dollar deals from the health care M&A market. Until
this month, that is. Two such deals were announced in the Pharmaceutical
sector (and a third in Specialty Pharmacy, see below). While neither deal
is a record-breaker, each illustrates how the globalization of the
pharmaceutical industry is driving continued consolidation.
Generics Gain Ground
In the first deal, the
larger of the two, Novartis AG (NYSE: NVS) is acquiring two related
generic drug companies, privately held Hexel AG and publicly traded
Eon Labs (NASDAQ: ELAB). Their connection lies in that fact that
both are controlled by the Struengmann brothers, Andreas and Thomas, who
founded Hexel and own a 66.7% stake in ELAB.
Based in Switzerland,
Novartis is the world’s sixth largest pharmaceutical company, generating
annualized revenue of about $28.25 billion. It has two primary divisions:
pharmaceuticals and consumer health. Its pharmaceuticals division has both
branded and generic units, with branded products outselling generics by
five to one. However, NVS would like to change that: it bought the
generics business of BASF AG in 2000, Solvenia’s Lek, DD for
$877.8 million in 2002 and Canada’s Sabex Holdings for $565 million
in 2004. These now form part of the company’s generic Sandoz unit.
Hexel is the
second-largest generic drug manufacturer in Germany, which is the largest
market for generics in Europe and second only to the U.S. in its appetite
for generic products. It has over 120 products, including analgesics and
cholesterol drugs. In 2004 it generated revenue of $1.7 billion. Eon Labs,
based in New York, develops, licenses, manufactures and distributes
generic drugs in the United States. Its products include 67 molecules in
147 dosage strengths; in 2004 it generated revenue of $431 million. ELAB
obtains new drugs either through internal development or through strategic
licensing or co-development with other companies, primarily Hexel. The two
of them generate combined annual revenue of $2.13 billion.
Under terms of this
all-cash deal, Novartis will offer $7.4 billion for all of Hexel and
two-thirds of ELAB. It will then offer $31 per share for the one-third of
ELAB that is not held by the Struengmann family, which represents an 11%
premium to ELAB’s prior-day price and a 25% premium to its price before
media speculation earlier in the month started ramping up the price. The
total purchase price works out to $8.4 billion.
The market seemed to like
the deal, with shares of NVS rising 3% on news of the deal. News of the
transaction also sparked talk of further consolidation in the German
generics market, with shares of Stada Arzneimittel (DE: STAGn), for
example, rising by nearly 10%.
Is this optimism
justified? The operations of these two targets will be combined with NVS’
Sandoz unit, creating a generic pharmaceutical company with annual revenue
of $5.1 billion and a portfolio of 600 drugs. In doing so, it would
supplant Israel’s Teva Pharmaceuticals (NASDAQ: TEVA), with annual
revenue of $4.8 billion, as the world’s largest manufacturer of generic
drugs, but not by much.
Though Teva didn’t appear
overly fazed by the Novartis’ deal, it has been rumored in the bazaar that
Teva is stalking a very large generic drug company in India, where
production costs are low. It if were able to score a company such as Dr
Reddy Laboratories (NYSE: RDY), it might quickly regain its position
as top dog.
The price to revenue (P/R)
multiple in the Hexel/Eon deal is 3.9x, which struck some analysts as a
tad expensive for a pair of generic drug companies. But the potential
rewards may outweigh the risk. First, this deal gives Sandoz access to
high-margin versions of hard-to-make branded drugs. This should help to
improve profitability at the division, which last year had an operating
margin of 7.7%, as compared with the 28.4% in its branded pharmaceuticals
division.
Second, as an all-cash
deal, this transaction may generate better cash returns than if it were
paid for in stock. Third, with increased size comes the ability to
generate scales of economy, reduce costs and engage competitively in the
generic drug market. The company hopes to capture 10% of the $100 billion
generics market by 2010. It might be countered, however, that NVS is
buying in markets where it has already suffered price pressure. The
presence of ELAB in this deal is key to Sandoz’s plans to grow in the
large U.S. market. Under a change approved by Congress in late 2003,
millions more people will qualify for Medicare prescription drug benefits
starting in 2006. Sandoz is positioning itself to benefit from the drive
to contain costs by migrating patients from more expensive branded drugs
to their generic counterparts.
And with about 150
manufacturers of generic drugs worldwide, scope remains for further
consolidation in this industry niche.
Novartis was advised by
Goldman Sachs. Merrill Lynch & Co. acted as financial advisor
to ELAB in this deal. Hexel did not use an investment bank.
Preparing for
Globalization
The second major deal is
taking place in the world’s second-largest pharmaceuticals market and
involves the combination of two Tokyo-based pharmaceutical companies.
Sankyo Co. (T: 4501) announced plans to buy Daiichi Pharmaceutical
Co. Ltd. in an all-stock deal that is worth $7.84 billion.
Sankyo is currently
Japan’s second-largest pharma company by sales, specializing in
circulatory drugs. It is projected to generate revenue of $5.6 billion for
the year ending March 31, 2005. However, its number-two position is being
threatened by the $7.76 billion merger of Fujisawa Pharmaceutical
(T: 4511) with Yamanouchi Pharmaceutical (T: 4503), announced last
year, which would demote Sankyo to number three—if it did nothing. What it
proposes doing is bulking up through an acquisition.
Daiichi is Japan’s
sixth-largest pharma company and specializes in drugs for infectious
diseases. For the year ending March 31, 2005, it is projected to generate
revenue of $3.1 billion.
According to the
mechanics of the deal, the two companies will first establish a holding
company by October 2005. In a share swap with the holding company, each
Sankyo share will equal one share of the holding company while each
Daiichi share will equal 1.159 holding company shares. As a result of the
stock swap, current Sankyo shareholders will own 58% of the holding
company, which is to be known as Daiichi Sankyo Co. and to be traded on an
exchange yet to be determined.
In the first phase
of this merger, the two companies will become subsidiaries of Daiichi
Sankyo Co., which will take its position as Japan’s second-largest pharma
company. In a second phase, their ethical pharmaceuticals business will be
combined while the status of their OTC drug and other business lines will
be reviewed.
The deal offers Daiichi
shareholders a 14% premium, and is valued at 2.5x revenue. The premium
struck some observers as a bit rich in the context of the Japanese market,
but others noted that it may be justified by Daiichi’s relatively higher
profit margin.
This combination will help
the two companies pool resources for the R&D budget they need to
accelerate drug development and remain competitive. And in the short term,
it may also cushion some of the damage to Sankyo’s profits from declining
revenue from its cholesterol drug, which went off patent in 2002.
Merrill Lynch Japan advised Daiichi in this deal; Nomura Securities
advised Sankyo.
After the dust settles,
Takeda (T: 4052) will remain the number one pharmaceutical company,
with $9.5 billion in revenue, followed by Daiichi Sankyo with $8.7 billion
and Astellas Pharma, formed from the combination of Yamanouchi and
Fujisawsa, with $8.1 billion. Also among Japan’s top 10 is Dainippon
Pharmaceutical (T: 4506), which last November announced a $2.2 billion
merger with Sumitomo Pharmaceuticals Co., a unit of Sumitomo
Chemical (T: 4005).
What is driving all this
consolidation in the Japanese pharma industry? A new law slated to come
into effect in 2006 would permit greater foreign investment in Japanese
companies. Viewed in one light, the merger of Daiichi and Sankyo, each of
which is more than 30% foreign-owned, might be viewed as a kind of poison
pill to ward off potential foreign takeovers. But while first and second,
respectively, in the domestic market, on a global scale, Takeda is the
14th largest pharma company in terms of revenue and Daiichi Sankyo, the
15th. So if one of the big pharma companies wanted to make significant
inroads into the Japanese market through acquisition, the targets might
well lack the resources to withstand an attractive offer.
And it’s not just the size
of Japan’s domestic pharmaceutical market that big pharma covets. Given
the low price-to-book ratio, relatively low market cap and attractive
pipelines of many Japanese pharmaceutical companies, they may be all but
irresistible to buyers.
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