PHARMA DEALS DURING MAY 2014
(Part 1 out of 3)

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.

Fuente: PMLive

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