Last year, the Dutch chemical conglomerate Akzo Nobel, N.V. (AS: AKZO) announced its intention to divest Organon BioSciences, its pharmaceutical division, either through an outright sale or by floating the unit in an IPO. It has found a willing buyer in Schering-Plough Corporation (NYSE: SGP), who is paying approximately $15.8 billion to acquire Organon BioSciences. With one stroke, SGP diversifies its earnings and doubles its development pipeline.
Netherlands-based Akzo Nobel operates in four different segments: Coatings, Chemicals, Organon and Intervet. Through its Coatings segment, for example, it has become the world’s largest manufacturer of paints. The Chemicals segment produces a wide variety of chemicals for industrial use, including intermediates for pharmaceutical products. The Intervet segment is engaged in animal vaccines and drugs. Organon manufactures and markets contraceptives, hormone therapy, central nervous system (CNS) products and APIs, among other products. Organon BioSciences comprises both Organon and Intervet. In 2006, Akzo determined that its future lay with the Chemicals and Coatings segments, and decided to exit the human and animal medicine businesses.
Organon has a strong franchise in treatments for CNS disorders and women’s health products, with both birth-control pills and treatments for infertility. Through Intervet, it has a strong biologics manufacturing capability, of more than passing interest to SGP. For 2006, Organon BioSciences generated revenue of $4.9 billion and EBITDA of $1.058 billion. The pharmaceutical business generated revenue of $3.6 billion, with the remaining $1.3 billion coming from sales of animal biologic products.
Of particular interest to the buyer are the five compounds that Organon currently has in Phase III clinical development, including drug candidates for anesthesia, schizophrenia, oral contraception, infertility and such symptoms of menopause as insomnia and hot flashes. This acquisition doubles the number of candidates that SGP has in Phase III, more than Pfizer (NYSE: PFE) currently has at that stage of clinical development. Even so, only one of the candidates, the schizophrenia drug asenapine, appears to have blockbuster potential.
Akzo and Pfizer had had an agreement for developing asenapine; that contract had allowed PFE to get rights to the drug if Organon changed hands, a clear disincentive for potential buyers. But PFE dropped out of the pact in November 2006, a move which opened the door for Schering to approach Akzo about buying Organon.
Schering-Plough manufactures prescription pharmaceuticals and consumer health products. Its prescription drugs treat allergies, arthritis, infections (Cipro) and cholesterol (Zetia and Vytorin). Its consumer health products include allergy treatments, cold preparations and laxatives, among others. It also has a strong animal health segment. On a 12-month trailing basis, SGP generated revenue of $10.7 billion, EBITDA of $2.1 billion and net income of $1.0 billion. SGP’s CEO, Fred Hassan, was CEO of Pharmacia before it was acquired by Pfizer. He was instrumental in guiding that transaction as well as the earlier acquisition of Monsanto. His fundamental strategy is to focus as much attention, if not more, on the long-term, revenue-generating capacity of the combined company as on cost synergies, which tend to be short-lived.
Under terms of the deal, Schering-Plough is to pay €11 billion in cash and assume €1 billion in Organon debt, for a total purchase price of $15.8 billion. The price-to-revenue multiple is 3.2x, the price-to-EBITDA multiple 14.9x. In good news for shareholders, according to analysts’ estimates, the sale is 37% higher than Organon’s value would have fetched in an IPO. Akzo intends to use the proceeds to buy back its stock (€1.3 billion), reduce pension liabilities and make acquisitions. News of this deal sent shares of Akzo to its five-year high. Goldman Sachs advised SGP while Morgan Stanley represented Akzo Nobel.
The transaction increases SGP’s size, as measured in revenue, by nearly 50%. It is characterized as accretive, generating $500.0 million in savings in the first three years. The addition of Organon’s drugs and therapeutic areas will help diversify SGP’s earnings away from its cholesterol franchise with Merck & Co. (NYSE: MRK). While sales of Zetia and Vytorin gave SGP almost $1.5 billion in equity income during 2006, helping drive the company’s growth, both drugs can revert to MRK under certain circumstances. Also, cholesterol-reducing drugs constitute the single-largest pharmaceutical category in the world, one subject to intense competition. Finally, SGP will become one of the largest animal health companies in the industry, with a stable and comforting cash flow from that business line.
In a way, this deal marks the end of an era. Akzo is among the last of the European companies with pharmaceuticals and chemicals. Last year Germany’s Altana AG sold Altana Pharma to Nycomed for $5.7 billion, while retaining its chemicals unit. Earlier, by 2000, AstraZeneca (NYSE: AZN) and Novartis AG (NYSE: NVS) had sold their chemical businesses, keeping pharmaceuticals.
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