Warner Chilcott's $3.1 billion acquisition of Proctor & Gamble's pharmaceuticals business on Aug. 24 significantly bolsters the Irish drug maker's sales force and adds to its already lucrative women's health portfolio with the addition of Asacol HD and Actonel ,while freeing P&G to focus on consumer health.
The deal also gives Warner Chilcott a commercial presence in 14 new countries, including Western Europe, where the Irish specialty pharma will take on 1,200 additional P&G sales reps. As a result, the transaction is an important part of a transition to becoming a global company, president and chief executive Roger Boissonneault said on a conference call announcing the news.
Currently, Warner Chilcott markets nine women's health and dermatology products, which each generate about $50 million to $250 million in annual sales, according to a Morningstar note. These include the hormonal oral contraceptive Loestrin 24 Fe and the hormone therapy products, Femhrt and Estrace Cream , for symptoms associated with menopause. Dematology products include Taclonex and Dovonex topicals for psoriasis and the antibiotic for adjunctive acne therapy Doryx.
P&G, which has for months signaled its desire to jettison its prescription drug business, will now focus all of its efforts on developing personal, oral and feminine care consumer health products ('The Tan Sheet,' Feb. 16, 2009).
At $3.1 billion, the deal's price tag seems reasonable -- it's approximately four times the 2008 net income generated by the P&G products. But Warner Chilcott execs have only a limited time to fully capitalize on two of P&G's major revenue-driving pharma products --Asacol HD (mesalamine) and Actonel(risedronate sodium) -- because of a ticking patent clock.
Asacol HD, a 5-aminosalicylic acid and a leading treatment for the inflammatory bowel disease known as ulcerative colitis, has managed to grab about half of the $1.4 billion U.S. market for 5-ASAs, according to IMS data cited by Warner execs on an Aug. 24 call to investors. But it could face generics in July 2014, or sooner.
Actonel, P&G's blockbuster osteoporosis medicine that is partnered with Sanofi Aventis, faces potential generic competition by 2014, or sooner, as well. But a next generation filing of Actonel is expected later this year. According to IMS, sales of Actonel through June 2009 were just south of $1 billion in the U.S., contributing a significant portion of the roughly $2.3 billion in revenues generated by P&G prescription products during that period.
The steady stream of cash provided by the P&G products should help Warner Chilcott pay down the debt proceeds it is taking on to finance the transaction. So far, the pharma has received commitments from a group of lenders to provide senior secured debt facilities and a senior unsecured bridge facility. More details on the debt are expected to be released in upcoming SEC filings.
However, analysts note Warner Chilcott's recent growth is due to a less-than stable source -- mainly products that have relatively weak patent protection. The products gained in this deal are no exception.
P&G's chief financial officer admitted as much on an Aug. 24 call to investors. "The value of this transaction reflects the finite patent lives of the assets being sold," he said. But RBC Capital Markets analyst Adam Greene was sanguine about the deal, noting that "Warner is good at defending franchises."
"While it is unusual for a company to 'buy' a patent cliff, we view this deal differently, as Warner is buying critical mass for essentially the sum of the cash flows with limited downside and significant upside if it can extend the asset life of either product," Greene said in a note.
A "double tax shelter"
The Ireland-based company also has a significant tax cushion to fall back on, which Greene called a "double tax shelter." In addition to tax benefits in Ireland, the pharma also has an agreement with Puerto Rico that provides a similar tax haven. That's important because one of the assets Warner Chilcott will acquire upon closure of the deal is P&G's manufacturing facility in Puerto Rico.
Under terms of the agreement, the majority of P&G's 2,300 pharma employees are expected to transfer to Warner Chilcott - nearly tripling the pharma's current staff - around Nov. 1 when the deal is expected to close. Warner Chilcott also gains co-promotion rights to Enablex (darifenacin) for the treatment of overactive bladder and P&G's pipeline, making its debut in the gastroenterology market.
The sale of P&G's pharma business will result in a one-time earnings increase for P&G of about $1.4 billion after-tax, or approximately $0.44 per share. P&G expects EPS dilution in the range of $0.10 to $0.12 per share in FY 2010 because of lost earnings from the business and overhead costs.
Warner Chilcott relies primarily on acquisitions for growth since it only spends about 5 percent to 8 percent of sales on internal research, according to Morningstar analysts. But given the competitive market for acquisitions, higher purchase prices may lead to lower returns on capital, the analysts cautioned.
-Carlene Olsen (c.olsen@elsevier.com)
This article is reprinted from "The Pink Sheet" DAILY –Aug 24, 2009
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