Over the past year, we have covered deals in which Indian pharmaceutical companies stretched their wings and made acquisitions in Europe and the United States. With the dismantling of the “Permit Raj”—a hornet’s nest of bureaucracy and regulation—and the freer crossborder flow of capital, Indian entrepreneurs felt emboldened to enter the global marketplace. As we all know, investment can be a two-way street, and this month’s largest deal illustrates how India is becoming a destination for investors and their money.
At the end of August, Mylan Laboratories (NYSE: MYL) announced that it is paying $736 million to acquire up to a 71.5% interest in Matrix Laboratories, Ltd. (Mumbai: 524794), a manufacturer of active pharmaceutical ingredients, or APIs, and solid oral dosage forms. India, with its lower manufacturing costs, is not the sole rationale behind this deal. Matrix has a presence in Europe as well as Asia and Africa; its Docpharma subsidiary has a strong distribution network in southern Europe and would give MYL a strong foothold in the European Union.
Based in Canonsburg, Pennsylvania, Mylan Laboratories manufactures generic and brand pharmaceutical products. On a trailing 12-month basis, Mylan generated revenue of $1.3 billion, EBITDA of $427 million and net income of $217 million. Spurred by the growth of generic competitors such as Teva (NASDAQ: TEVA), MYL has been scrambling to grow through acquisition. In July 2004 it targeted King Pharmaceuticals (NYSE: KG) in a deal valued at $4.0 billion, or 2.9x revenue; however, inability to come to revised terms ultimately scuttled the deal in February 2005. Since then, the competitive pressures in the pharma industry have not lessened, prompting MYL to maintain its search for a merger partner.
Headquartered in Secunderbad in the Indian state of Andhra Pradesh, Matrix manufactures APIs and solid oral dosage forms at a variety of plants in India and abroad. Among its products are antibacterials, antihistamines, antiviral drugs, cardiovascular drugs and proton pump inhibitors. For the year ended March 31, 2006, Matrix generated revenue of $261.6 million, EBIT of $59.8 million and net income of $45.0 million. The company ranks seventh by market value among India’s top pharma companies. Importantly, it is the world’s second-largest API player with respect to the number of drug master files, with over 165 APIs in the market or under development.
Matrix has grown internally and through acquisition. In October 2005 it paid roughly €158 million for the Belgium firm Docpharma NV, which has strong marketing and distribution networks in the Benelux countries and in southern Europe. With the acquisition of Docpharma, about half of Matrix’s revenues are now generated in Europe. It also has a 43% stake in the Swiss firm Explora Laboratories S.A., an R&D firm focused on APIs and corticosteroids. In December 2005 it acquired a controlling interest in Concord Biotech Ltd., an Indian firm with much the same business focus as Explora’s.
Matrix currently has in place a deal to acquire a controlling interest in the Chinese company Mchem Group so it can enter the API market in that country. The company had considered a merger with Strides Arcolabs Ltd. in 2005, another Indian pharma firm, but called it off because no agreement could be reached on valuation.
Mylan is offering to pay Rs. 306 per share for 51.5% of Matrix. Selling shareholders include Singapore’s state investment firm Temasek Pte. Limited, NewBridge Capital, Spandana Foundation, and Matrix chairman Sri N. Prasad, who will retain a 5% interest in Matrix. (NewBridge, we should note, is a joint venture between Texas Pacific Group and Blum Capital.) Mylan will then make an “open offer” to Matrix’s remaining shareholders to acquire up to an additional 20% of Matrix’s shares outstanding. The total purchase price is expected to be approximately $736 million. Under terms of the deal, Matrix is to remain a publicly traded company in India and will continue to operate on an independent basis.
This price offers shareholders a 10% premium to the stock’s prior-day price and a 15% premium to the 30-day average stock price. The price to revenue multiple is 2.8x and the price-to-EBIT multiple is 12.3x. The purchase price contemplated in the deal as currently structured implies a value of $1.029 billion for a 100% stake in the firm, with a price to revenue multiple of 3.9x and a price-to-EBIT multiple of 17.2x.
This deal is to be financed using MYL’s existing credit facility and cash on hand. Some of the funds received by NewBridge, Temasek and N. Prasad will be used to purchase newly issued shares of MYL common stock. NewBridge will invest about $93 million, Temasek $46 million and N. Prasad $25 million.
The geographic diversification to be garnered in this deal lowers Mylan’s risk to heightened price competition in the U.S. generic market. The combined company will offer broader therapeutic categories for customers. The vertical integration the deal implies will enhance the company’s supply chain capabilities, as well. For example, Matrix is currently the world’s largest supplier of generic anti-retroviral APIs; through this franchise, Mylan and Matrix plan to partner with international programs to bring lower-cost solutions to patients in those parts of the world most severely stricken by HIV, regions currently under-penetrated by the pharma industry.
Analysts’ opinions have been somewhat mixed. Some grouse that the acquisition multiples seem high, but with the recent integration of Docpharma’s financials into Matrix’s, Matrix’s 2006 results should be considered on a pro forma basis so it may be some time before anyone can come up with definitive numbers or a definitive conclusion on that score. Even so, when Teva acquired IVAX last year, it paid 4.2x revenue and 24.6x EBITDA, so the multiples in this deal don’t seem particularly out of line. Others see in this deal a blueprint for future expansion in the global generic pharma market. We tend to side with the second group, viewing India as both an emerging power and an important market in the pharmaceutical industry that can be ignored only at your peril.
Merrill Lynch and DSP Merrill Lynch served as financial advisor to Mylan. ABN Amro and UBS Limited acted as financial advisors to the selling shareholders.
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