In May, the deals announced by Big Pharma companies to streamline and rationalise their business operations continued apace with a high level of M&A activity. The deals mentioned represent the valued deals that were announced during May but there were two major M&A offers that did not materialise in the month. Firstly, the Pfizer bid for AstraZeneca and, secondly, the Valeant bid for Allergan.
“What’s it all about when you sort it out, Alfie”?
Prof Brian Smith in his book The Future of Pharma describes how pharma companies will evolve to adapt to the changing social and technological environment. He postulates that “the large hierarchical and integrated organisation structures…have run their course as the optimal structural form” and companies will restructure to become more focused in specific business areas such as research (‘Genii’), generics (‘Monster Imitators’), OTC (‘Get Well, Stay Well’), etc. This implies the current conglomerate big pharma companies will narrow down to specialise in certain areas such as research or OTC but not both.
One company with an uneasy mixture of pharmaceuticals and consumer products is Reckitt Benckiser. In the first quarter 2014 report it says “The strategic review [of the pharmaceutical business] we announced in October of last year continues to progress well. All options continue to be considered. A capital markets solution is emerging as a strong option.” The difficulty is that Suboxone (for treatment of drug addiction) sales are being hit by generic competition. In the first quarter sales dropped by 11 per cent and in 2013 operating profit for the division dropped 21 per cent. It is therefore very surprising that this month Reckitt Benckiser announced two deals relating to addiction products: a $145m deal with Xenoport for arbaclofen placarbil at end phase IIa for treatment of alcohol abuse; and a supply and marketing agreement with AntiOp for intranasal naloxone for opioid abuse. What’s it all about?
It is certainly the case that Big Pharma companies are currently rationalising their business but most companies seem to be maintaining more than one business area, probably to minimise risk. Why is the rationalisation happening now? It is driven, we believe, by the short term impact of lower prescription sales and profitability caused by generic competition which are seriously reducing blockbuster product sales as patents expire. Big Pharma companies are seeking to boost short/medium term profitability, and perhaps to simultaneously address the long term environmental changes, by rationalising the business and focusing on key strategic areas.
“The minute you walked in the joint I could see you were a man of distinction, a real big spender”
Last month we saw Novartis divest vaccines and animal health, acquire more oncology and set up a joint venture with GSK for consumer health. Similarly, this month the top value deal at $14.2bn is the acquisition by Bayer of Merck & Co’s consumer health business assets including global brands such as Claritin. According to reports, this will make Bayer the second biggest consumer health company in the world with sales of $7.4bn, of which $2.2bn will come from the Merck products. Bayer seemed to have paid a very high price representing 6.5 x sales and 21 x EBITDA. No wonder Reckitt Benckiser dropped out of the bidding.
According to Reuters, Reckitt Benckiser’s chief executive Rakesh Kapoor said “We are a highly disciplined acquirer with strict return metrics which we will not break.” Bayer justified the price based on tax savings and cost synergies of $200m by 2017, a familiar story. Perhaps Bayer took comfort from “a related transaction” announced at the same time whereby Merck and Bayer entered into a co-development and co-commercialisation agreement for soluble guanylate cyclase modulators for $2.1bn. One product is approved and the other is in phase IIb. Bayer will lead the commercialisation in the Americas and Merck will lead elsewhere.
Not content with the Bayer deals, Merck & Co also divested its ophthalmic business (mainly Timolol) in Japan, Asia Pacific and Europe to its licensee Santen. For sales of $0.4bn the price was $0.6bn plus sales milestones. Merck sold its US ophthalmic business in 2013 for 1.5 x sales to Akorn. Similarly, in keeping with the portfolio rationalisation, Bayer sold its interventional device business to Boston Scientific for $0.4bn representing 3.3 x sales.
GSK was also active streamlining its portfolio with the divestment to Pernix of the US rights to Treximet, a sumitriptan/naproxen combination, for $267m representing 3.4 x sales and an estimated 11 x EBITDA. This was a complex deal involving the assignment by GSK to Pernix of the product development and commercialisation agreement for the product developed by Pozen, the payment by Pernix of $3m to an investor, warrants in Pernix shares to Pozen plus royalties of 18 per cent.
In the last days of May, GSK was reported to have invited private equity companies, presumably those with investments in pharmaceutical companies, to bid for GSK’s mature products. This is quite a turnaround from the situation some years ago when a director of one of the UK Big Pharma companies said it did not divest mature products because it got no credit for such disposals in the share price. The fact is acquiring old brands is fraught with operational and contractual difficulties in regulatory, manufacturing and marketing. This has been demonstrated in the past by a number of cases where the only willing buyers of the products were contract manufacturing companies offering low value deals.
“Oh, the shark has pretty teeth dear, and he shows them pearly white”
Judging by Pfizer’s bid for AstraZeneca (AZ), it seems the fashion for mega mergers in the pharmaceutical industry is not yet over. The last offer of 45 per cent cash and 55 per cent paper representing £55 per share (45 per cent premium over the pre-bid price) valued AZ at £69.4bn or $117bn equivalent to 4.5 x sales and 32 x operating income. The offer resulted in a lot of hand-wringing by UK politicians about the loss of jobs and research expertise in the UK and perhaps some hand-rubbing at the prospect of additional tax revenues.
In the hearings before the UK parliamentarians, Pfizer made it clear the price could only be sustained based on tax savings estimated by analysts at $1.4bn a year. The UK tax corporate rate will be 20 per cent in 2015 compared to 35 per cent in the US. The UK also has a 10 per cent tax rate on profits earned from UK patents. The difference in tax rates across the world has driven US companies to accumulate cash overseas, Pfizer is reported to have $69bn offshore. The loss of US tax revenue also prompted political hand-wringing by some Senators and a threat of legislation against ‘inversion’ as US companies increasingly move offshore for tax purposes.
AZ rejected the last Pfizer bid as too low which immediately prompted some investors to complain that AZ should have engaged in negotiations with Pfizer. This is the new ‘norm’, where virtually every M&A transaction creates a storm of protest (and litigation) by investors who want to cash in their chips at the highest possible price. Pfizer may be back in town in six months’ time but one can’t help thinking its bid is driven more by financial than strategic motives.
“When that shark bites with his teeth dear, scarlet billows begin to spread”
The other major M&A rumble was the hostile bid by Valeant for Allergan. In the last week of May, Valeant increased its offer twice to a final eye watering value of $54bn (8.7 x sales, 27 x operating income). The offer represents an Allergan share price of around $180, a 54 per cent premium over the pre-bid price. According to Reuters, Pershing Square – a Valeant ally and a hedge fund investor holding nearly 10 per cent of Allergan’s shares – has called for a meeting to replace the Allergan Board. The question is whether Valeant’s primary motive for the bid is strategic or financial. Valeant is domiciled in low tax Bermuda and in its initial offer claimed there would be a “high single-digit tax rate for the combined company in addition to cost synergies”. Allergan has questioned this and the sustainability of the Valeant business model based on growth from debt-funded acquisitions.
At the end of March Valeant had $17bn of long term debt. Allergan’s presentation filed with the SEC claims that growth in the two largest Valeant acquisitions, Medicis and Bausch & Lomb, since Valeant acquired them, has been driven by price increases with loss of volume/market share. There are a number of companies that have a growth strategy based on acquisitions e.g. in Europe, Meda (rejected bid from Mylan), AMco and previously Nycomed (now owned by Takeda). The companies funded by debt provided by private equity are usually sold so Allergan’s questions about the sustainability of the business model are valid. Nevertheless during the month Valeant divested its injectable cosmetic fillers for face wrinkles to Nestle (Galderma) for $1.4bn (see table below). This sale clears potential anti-trust issues if Valeant acquires Allergan with its Botox franchise. In essence, the Allergan product range is a good strategic fit with the Valeant business.
“That’s life, that’s what all the people say, you are riding high in April and shot down in May”
The traditional Big Pharma business model was continued in the month with Abbott acquiring the Chile-based branded generic company, CFR Pharmaceuticals for $3.3bn (4.3 x sales, 34 x EBIT) to expand its presence in Latin America. Abbott’s bid represents a 52 per cent premium on the share pre-bid price. CFR has changed from buyer to seller in 6 months. Last November, its bid for the South African company, Adcock Ingram, was rejected by the Government shareholders in the company. As in France with the GEC bid for Alstom and in the UK with AZ, Governments are increasingly concerned about divestment of local major companies to foreign-owned entities.
Lundbeck, too, is sticking to its traditional business model. It wishes to continue developing and commercialising innovative neurological products and to expand its US presence. The acquisition for up to $658m (a 59 per cent premium on the pre-bid share price) of the US company, Chelsea Therapeutics, achieves both those goals. Chelsea has the recently FDA-approved droxidopa, the first and only symptomatic treatment for neurogenic orthostatic hypotension ready for launch later this year.
Shire also continues with its well-established strategy to develop and market products for treating rare diseases with its acquisition of the privately-owned US company, Lumena Pharmaceuticals for $260m plus “near-term contingent milestone payments related to ongoing clinical trials”. Lumena develops oral products for treating liver disease and has two oral inhibitors of the apical sodium-dependent bile acid transporter (ASBT) in phase II to improve liver function. The lead product has potentially four potential orphan indications.
As if one acquisition per month is not enough, Shire also bought another rare disease company, the privately-owned Australian-based Fibrotech, for $75m plus contingent payments based on the achievement of development and regulatory milestones. The company has a novel compound in phase Ib for treatment of diabetic nephropathy. Subject to success, a phase II study will start in the rare indication of Focal Segmental Glomerulosclerosis. Shire is really motoring. It acquired Viropharma last November for $4.2bn which contributed $93m of sales in the first quarter of this year. Rumours are already circulating that Shire (market capitalisation $34bn) is a target for an acquirer. Apparently Allergan’s initial talks with Shire were rebuffed and at the end of April, Allergan was said to be preparing a bid. Apart from the strategic objectives of a combined company, such a bid could fend off the bid for Allergan from Valeant. Oh and by the way, because Shire is domiciled in Ireland, where the corporation tax is 12.5 per cent, Allergan would make significant tax savings; a familiar story.
“I did it my way”
In the same way that Big Pharma is reshaping its business, so are the smaller companies. This month there were two acquisitions of generic companies. Akorn acquired Versapharm, a privately-owned US company that develops and markets generic dermatology products. The cash price of $440m (debt financed) represents around 4.5 x sales. Akorn is better known for its ophthalmic business where it acquired three products from Merck & Co in November 2013 for $53m.
Hikma, the Jordanian generic company, acquired the assets of the US-based Bedford Labs (owned by Boehringer Ingelheim), a generic injectable manufacturer, for $300m (16 x sales). The price consists of $225m upfront and $75m subject to performance-based milestones over the next 5 years. The high sales multiple and a negative EBIDA reflects the manufacturing problems at the site which prompted Boehringer to sell. At least the $225m will go some way towards paying for the $650m settlement of the US Pradaxa litigation Boehringer announced in May.
“Let’s face the music and dance”
Finally, it is a pleasure to report that licensing deals have had a resurgence this month hopefully reflecting the synergistic benefit of partnering between biotech and pharma to develop innovative medicines. In addition to the Xenoport deal reported above, there were six valued deals with an aggregate value of $2.7bn. Top of the list was Ophthotech’s commercialisation and co-development agreement with Novartis for Fovista, an anti-PDGF agent, in phase 3 for wet age-related macular degeneration (AMD). Novartis has ex-US commercialisation rights and plans to develop a combination product with a Novartis anti-VEGF agent. Coincidentally two weeks earlier, there was another deal for a product for treating AMD. Regeneron entered into a $653m development and commercialisation collaboration to combine Avalanche’s gene therapy vector platform with Regeneron’s molecules. Regeneron also has a time limited first right of negotiation to Avalanche’s VEGF agent in phase IIa for AMD.
BMS also entered into a platform deal with CytomX for so-called “Probodies,” monoclonal antibodies that are selectively activated within the cancer microenvironment. BMS has rights for up to four oncology targets. There is a $50m upfront plus $298m per target (Note: only one target has been assumed in the headline value in the table below) plus “tiered mid-single-digit rising to low-double-digit royalty payments” eg 5 per cent to 12 per cent? Why are companies so coy about announcing royalty rates? In contrast to the platform deals by BMS and Novartis, Takeda has taken an option to license from MacroGenics a single product, MGD010 a B-cell targeted monoclonal antibody for treatment of autoimmune disease. Takeda paid $15m upfront and has the option to enter a global licence following the completion of phase Ia. If Takeda exercises the option a further $18m is payable plus up to $469m in milestones plus double digit royalties.
One year ago AstraZeneca acquired Omthera. On May 7 Epanova, a soft gelation capsule containing Omega-3, was approved by the FDA as an adjunct to diet to reduce triglyceride levels in adults with severe hypertriglyceridemia. On May 14 Omthera announced a $45m deal to license Ligand’s prodrug platform for delivery of drugs to the liver. The timing suggests the Ligand deal was in the wings waiting for the FDA approval. As a footnote, Ligand this month licensed to what appears to be a new company called Viking Therapeutics, five of Ligand’s small molecule programmes and provided a $2.5m convertible loan to fund the development. Ligand is to receive a fee in Viking equity at the time of a private or public financing plus milestones and royalties. Ligand described it as a “creative licensing transaction”.
Song quotes from: Alfie; Big Spender; Mack the Knife; That’s Life; My Way; Let’s Face the Music and Dance.