Monday, December 13, 2010

2010 M&A DOTY Nominee: Teva/ratiopharm

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

There's suicide. There's red-hot competition. There's rumors of personal CEO visits. There's even some Kindler (remember him? That industry veteran who headed up the world's biggest drug company and then retired one Sunday to recharge his batteries?). With that line-up, how could anyone not vote for Teva's acquisition of ratiopharm for M&A Deal of the Year?

We (the Teva/ratiopharm supporters, I know you're out there in your hundreds) don't need snazzy deal structures, CVNs, CVRs or anything else. Nothing clever. Just a good old story of a good old fight, with money of course, for an apparently attractive -- yet vulnerable -- target. And a relevant one, at that: generics has been the the decade's new hot target for pharma. (Pharma beyond Novartis, that is).

Germany's number-two generics firm had been up for sale since January 2009, following Adolf Merckle's suicide. (He and his family controlled VEM Holding, ratiopharm's owner, but was hit by the financial crisis.) The company had to go; that was the deal VEM struck with its angry creditor banks. Towards the end of the process, there were believed to be three suitors, Pfizer, Actavis and Teva.

It looked, at one point, as if Pfizer would win it; Kindler, after all, was reported to have been spotted visiting the company's Ulm headquarters in March 2010, just before the winner was announced. (Last-ditch effort on Kindler's part? Was this disappointment one of the reasons he, errm, left?)

Pfizer wanted ratiopharm since Pfizer needed -- needs -- all the revenue it can get (including in those surer-fire sectors like generics, where it and several of its Big Pharma peers have laid significant stakes), in order to offset the impact of generic Lipitor. ratiopharm offered a strong European presence, and some emerging market holdings too.

But Teva was hungry too, and Teva does this -- generics -- for a living. It's renowned in its aggression determination. The company had been on an acquisition binge for the previous decade, building up to almost $14 billion in annual sales in 2009 (that, by the way, is about Lipitor-sized), and the plan, announced January, was to double that again in 2015.

Given that, and Teva's very weak position in Germany, the largest European market, and it's easy to see why the Israeli group did stump up $4.9 billion for the booty, including $820 million in debt--exceeding analysts' expectations, and apparently also exceeding what even Pfizer was willing to pay. Teva needed to solidify its position in the European generics sector, where it promised sales would increase to $9 billion from just over $5 billion in 2009.

Never mind that Germany is one of the toughest markets when it comes to generics pricing: for the last 3-4 years, companies have been competing on price via a tendering process for two-year sole-supply contracts to the country's sick funds, saving said funds hundreds of millions of Euros. Indeed, this 'all or nothing' set-up makes it even more important that Teva has a place at the table with major customers, as Teva's European CEO put it to our Pink Sheet DAILY reporter. ratiopharm had done very well at winning tenders.

So as well as providing a good, meaty fight with a strong cast, this deal is a finger-on-the-pulse of the decade's industry trends: generics' new sexiness, payer-driven pricing pressure (will Germany become a template in that regard?), and oh, yes, we forgot to mention, emerging markets (ratiopharm had a bit of that) and follow-on biologics (ratiopharm had a bit of that, too, via its BioGenerics division).

In fact, are there any reasons not to vote for it?

Ulm cathedral image by flickr user donvanone used under a creative commons license

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