For the third time this year, our deal of the month involves a transaction in the Biotech sector. California’s Chiron Corp. (NASDAQ: CHIR) has agreed to buy Britain’s PowderJect Pharmaceuticals (LSE: PJP) for £542 million, or approximately $878 million. This purchase, the company’s first big move since appointing its new CEO, Howard Pien, in March, will make CHIR the world’s second-largest producer of vaccines.
Based in Emeryville, California, Chiron is a biotech company that develops products for preventing and treating cancer, cardiovascular disease and infectious diseases. Its three main business segments include vaccines, drugs and tests to screen donated blood for viruses. Its vaccine portfolio includes over 30 vaccines for meningococcal disease, hepatitis and childhood maladies.
On a trailing 12-month basis, Chiron generated $1.35 billion in revenue, $356 million in EBITDA and $261 million in net income. CHIR is 43% owned by Swiss pharma giant Novartis AG (NYSE: NVS). At mid-May, the company’s market cap stands at $7.7 billion.
In recent years Chiron has been an active acquirer. In 2000 it paid $700 million in cash, or 8.75x revenue, to buy Seattle’s Pathogenesis Corporation and its portfolio of products for treating infectious diseases. In early 2002, it paid $61 million in cash to acquire Fremont, California’s Matrix Pharmaceuticals and its cancer products. Later the same year, CHIR paid $3.7 million to buy the remaining 80% of Pulmopharma GmbH, its distributor in Germany and Austria. As a result of its diversification efforts, about 30% of CHIR’s revenue derives from the sales of vaccines.
Based in Oxford, England, PowderJect manufactures several vaccines, some under contract to government agencies. PJP manufactures the Fluvirin flu vaccine, its primary product, as well as vaccines for cholera, polio and yellow fever, among other diseases. Fluvirin is the leading flu vaccine in the United Kingdom, and just one of two available injectable flu vaccines in the United States. The company is working on new drug delivery methods, including a powder injection system that obviates the need for needles.
For the fiscal year ended March 31, 2003, PJP generated revenue of $256.6 million (£158.5 million), EBITDA of $54.6 million (£33.7 million) and after-tax profits of $35.5 million (£21.9 million). It should be noted that $150.9 million (£93.2 million), or nearly 60% of total revenue, came from the sale of one product, Fluvirin.
In 2001 PJP paid $50 million to buy SBL Vaccin AB in Sweden, giving the company an attractive manufacturing capacity in Scandinavia.
Under terms of the current deal, CHIR will pay 550 pence in cash for each of PJP’s 98.5 million shares outstanding in a tender offer. UBS Warburg is serving as CHIR’s financial advisor in this transaction while Credit Suisse First Boston is acting as PowderJect’s.
This is not the first time the two companies have been to the rodeo. Six months ago, CHIR offered to buy PJP for 500 pence per share, or about $728.5 million (£450 million).
The higher offer has now brought PJP on board. The present offer makes the price to revenue multiple 3.42x and the price to EBITDA multiple 16.1x. While it offers PJP shareholders just a 3.8% premium to the stock’s closing price the day before the announcement, it offers a 31% premium to PJP’s average closing price of 421 pence for the past three months. Intense speculation about a deal in April had helped drive up PJP’s price. PJP’s board has unanimously approved the sweetened deal; approximately 19% of the company’s shares, coincidentally the amount owned by PJP’s CEO, are being voted in favor of the transaction.
Not unexpectedly, CHIR’s shares dropped on the announcement of this deal. Even so, the only organization with qualms about this deal seems to be Standard & Poor’s Ratings Services, which placed CHIR’s A- corporate credit and senior unsecured debt ratings on CreditWatch with negative implications. Why? Even though CHIR has nearly $1.3 billion in cash on hand and investments, versus only $418 million of debt, with no significant near-term debt maturities, this deal will naturally drain off a significant chunk of the company’s cash. Those fears should evaporate, however, if CHIR’s new CEO can integrate PJP as well as his predecessor assimilated Pathogenesis.
Chiron’s acquisition of PowderJect will unite the world’s fifth- and sixth-largest vaccine companies, respectively. In doing so, it will create the world’s number two producer of vaccines, a company with $1.6 billion in annual revenue. Even as the globe’s second-largest producer of vaccines, the combined company will still face robust competition from such giants as Aventis SA (NYSE: AVE), the world’s number one vaccine maker, and GlaxoSmithKline (NYSE: GSK), a company with significant resources behind its vaccine business.
The cultural match between Chiron and PowderJect appears to be a good one: both are nimble companies that in recent years have been the first to market with their flu vaccines. The synergies, as they say, are already good: each year CHIR sells about $100 million in vaccines outside the U.S., primarily in Europe, while PJP sells about $100 million inside the U.S. Somewhat ironically, the acquisition of a British company gives CHIR a strong platform for entering the flu vaccine market in the United States.
The timing is opportune, and not just because all the buzz about SARS has made the vaccine industry hot for the moment. Wyeth (NYSE: WYE) has stopped making conventional flu shots to pursue the nasal spray flu vaccine that it has developed with MedImmune (NASDAQ: MEDI) and which is expected for next winter’s flu season. WYE’s exit obviously leaves a vacuum for other companies to fill in the conventional flu vaccine market. Since it is not expected to be approved for the 50 and older crowd, the group that most relies on flu vaccination, the Wyeth-MedImmune nasal vaccine should not take much market share away from vaccines that are delivered in a more conventional manner.
Some cost savings are also likely to be realized from this deal. Given the overlap in the markets they serve, this acquisition is likely to result in some rationalization of the two companies’ sales forces.
For PJP and its shareholders, this deal will also help to reduce the company’s dependence on its flagship vaccine. The deal may also deflect attention from the criticism of PJP management which created a stir last year when the company snagged a £35 million government contract after the CEO donated £50,000 to the ruling Labor Party.
Some rumors have floated around that Switzerland’s Berna Biotech (SWX: BBIZn) might be interested in a combination with PJP. Although speculation about such a deal has helped to push Berna’s shares higher this year, Berna’s CEO has denied the company is in talks with either party. He says a counterbid is unlikely.