Monday, February 01, 2010

Europe Matters, says Cephalon, with $590m Mepha Deal

"Europe hasn't been high-profile for a lot of you" [mostly US analysts], declared Cephalon's Chairman & CEO Frank Baldino, "but it should be." As a European-based (and minded) blogger, that was my favorite--whoops, should I say favourite--quote from the conference call today annoucing Cephalon's CHF 622 million ($590 million) cash acquisition of private Swiss generics firm Mepha.

The deal is all about diversification and internationalisation; "we want to embellish all three of our businesses--in brands, branded generics and generics--for more stability and less risk," declared Baldino on the call. "This is about growing top-line and bottom line, and generating cash." Sound familiar? Yes, well that's because you've heard it from most (well, many) Big Pharma CEOs recently, too. Don't put all your eggs in one basket. Especially when you're pipeline's looking a bit shaky; Cephalon's reslizumab (Cinquil) disappointed late last year in EE (we can't spell it out), and the rest, writes Baird analyst Thomas Russo is "lacking in visibility".

Talking of Big Pharma though: Should we then expect a big emerging markets push from Cephalon soon too? Well, this deal already expands their presence in Eastern Europe in particular, and some Eastern African markets. It's not China and India, but it's emerging.

Still, this deal is about Europe, and Europe's generics market which--given the big cost-cutting splurge among most governments and insurers--has been growing steadily. "Unlike businesses in the US, these European businesses are lower margin, but stable," explained Baldino, mentioning Mepha's five-year CAGR of about 13%.

Low margin, stable businesses weren't very sexy five years ago, but are right now, especially as uncertainty over the future of the US prescription drug market continues to build. "We will now have 30% of our global sales outside of the US," piped Baldino. "There's still a way to go" to achieve real geographic balance, "but this is a real step towards that," he said.

Add to this the tax benefits of buying a Swiss company ("we'll certainly take advantage of those [tax-related] opportunities for our shareholders...") and the price, which, at just over 1.5 times 2009 sales looks reasonable (compare Ebewe, which Sandoz bought for 4.4x sales, though that was specialist), and you can see why Baldino's on a roll.

But bidding was nevertheless highly competitive. Mepha, owned by Germany's Merckle family, was on the block for a while along with sister company ratiopharm as a result of patriarch Adolf Merckle's suicide a year ago during the financial crisis. Ratiopharm is likely to be snapped up very soon, most likely by Teva. Reuters reported half-a-dozen Mepha suitors in November 2009, and that the price target was about CHF700m.

"There were a number of bidders involved to the very end," revealed Baldino. "Our advantage," he continued, "was that the two businesses fit like a hand in a glove." That doesn't quite explain why the price didn't reach Merckle's alleged target--but who knows what, if any, non-financial concessions were granted (like commitments to retain staff, for instance, given the wonderful complementarity; we didn't get any comment back on that from Cephalon in time for this blog).

Baldino still hopes to realize plenty of synergies through supply-chain and distribution functions, though, as well as cutting various central functions.

Cephalon made its first significant step into Europe in 2001 buying France's Groupe Lafon, followed four years later by the $360 million acquisition of Zeneus Pharma. (If you're really into European spec pharma history and strategy, read this.) The US-based group has continued acquiring ever since in what Baldino describes as the group's "multiple strategies that we execute simultaneously", across high-margin biologicals, small molecules and generics (and biosimilars, where Mepha also apparently provides a foothold). Recent deals include options to buy allergy and inflammation company Ception and BioAssets Development (focused on biologicals for pain) and the acquisition of Australia's Arana Therapeutics in February 2009.

Mepha is the leading generics firm in Switzerland with a 38% share, and markets more than 120 products in 50 countries and has about 50 pipeline candidates. Baldino says this cash deal won't change Cephalon's debt position.

image by flikrer rockcohen used under a creative commons license

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