Rumors about Teva's next M&A step have been swirling around the company for the better part of a year, but so far management has been mum except for vague generalities ('The Pink Sheet,' DAILY, Jan. 12, 2010). ratiopharm, the second largest generics manufacturer in Germany. is up for sale, with a bidding deadline of Feb. 5. Finalists reportedly include Teva, Pfizer, and - less likely, according to reports - Sanofi-Aventis and EQT Partners, a private equity firm.
Ratiopharm would catapult a buyer into the top ranks of generics suppliers in German generics, a complicated and troubled but important market for European players. Despite the cut-throat environment, Teva believes it has good prospects there [Editor's note: Part 1 of this story discussed Teva's overall strategy of developing opportunities in Germany. ('The Pink Sheet' DAILY, Jan. 22, 2010).]
Because it's privately held, getting a true sense of ratiopharm's value is difficult, but it has some attractions that could help a new owner, as well as weaknesses that limit its value to potential buyers. However investors weigh its characteristics, ratiopharm is likely to command low multiples compared to historic transactions, predicts Martin Brunninger, an analyst at Bryan Garnier, a securities firm in London.
That would contrast sharply with the 4.4-times-sales multiple Novartis paid for EBEWE, in May 2009, although EBEWE isn't a straightforward comparator since it specializes in higher-margin generic oncology injectables ('The Pink Sheet' DAILY, May 20, 2009).
With sales of €1.9 billion ($2.68 billion) in 2008--the last publicly reported figures-- ratiopharm has a 21 percent share of the German generics market, estimates Brunninger. Teva currently has a market share in the low single digits, making it the fifth largest player, thanks to its acquisitions of Barr Pharmaceuticals in 2008 and of Ivax in 2005.
Gaining market share in the highly-fragmented German generics market is critical, given the ongoing pricing pressures there. Successful suppliers need scale, efficiency, a mix of commodity generics and higher-margin branded generics, specialty products, and over-the-counter products. A broad portfolio also helps gain clout when competing for tenders, which German insurers now demand for a range of commodity generics.
The current leader, the Sandoz subsidiary of Novartis, which bought the German firm Hexal about 2005 (See 'Novartis/Hexal: Generic Consolidation, and More,' IN VIVO, April 2005), has 24 percent of the market (by volume). Third and fourth on the list are two troubled companies - Stada, a family-owned, publicly traded company, which is also up for sale, and the equally troubled Betapharm, a division of Indian generics manufacturer Dr. Reddy's, which is in the midst of a restructuring.
Altogether, about 40 to 50 firms, many of them family-owned, collectively have 50 percent share of the German market. Within five years, three to four companies will capture 60 to 70 percent of that market, with many small companies either relegated to focusing on niche product lines, being bought, or shutting down, says Gerard Van Odijk, president and CEO of Teva Pharmaceuticals Europe.
Ratiopharm's OTC Business Could Help Pull in Pharma Sales
All of the domestic suppliers have been impacted by Germany's changes in health care financing--and some, including ratiopharm, also are pummeled by situations particular to them. In 2008, VEM VV, the holding company which owns ratiopharm, put the generics business up for sale to assuage angry VEM creditors. In January 2009, the company's founder, German industrialist Adolf Merckle, committed suicide rather than face financial ruin because of bad investments he had made outside of the pharma industry. The impact of these problems on the company's performance is difficult to determine since it is privately held and hasn't yet released financials for 2009.
Ratiopharm, however, would position Teva to be neck-in-neck against Sandoz -- a position that would likely help it win more tenders with quasi-public German insurance companies, which determine much of health care reimbursement. And the German company offers more than just market share. Its generics business derives a significant proportion of sales from outside of Germany, giving it a geographic hedge. In addition, the company generates roughly 20 percent of sales from over-the-counter products.
The OTC part of its business could be important for buyers because of Germany's financing regulations, said Brunninger. Companies with OTC products in Germany can gain an advantage by giving pharmacists incentives to choose their products, which is no longer the case with prescription drugs (manufacturers used to be able to give pharmacists incentive or rewards for using their generics).
Thus, generics companies with OTC components tend to do better with German pharmacists than pureplay generics companies (for those parts of the business that are not yet restricted by single-source tender contracting. Initially, insurers awarded tenders to two or three manufacturers, but more recently, a few, including the powerful AOK, have started to award single-source or winner takes all contracts, in effect eliminating a pharmacist's ability to choose, even from a limited group).
In addition to Teva, the other frequently mentioned finalist is Pfizer, which began two years ago putting into action plans to build its minor U.S.-based generics business into a global leader (See 'Pfizer's Ambitions in the Off-Patent World,' IN VIVO, March 2009).
So far, however, Pfizer's strategy has been to license in products from outside suppliers, namely the Indian companies Aurobindo and Claris. Pfizer isn't talking about its plans and analysts disagree whether it is willing to tie up capital in generics, especially in a market as complex as that of Germany's, or it believes it can best continue to build its business through alliances. David Simmons, head of Pfizer's Established Products Business Unit, which runs its generics business, argues that he can build the business through alliances because "he has as much control as if he ran it himself," says David Maris, an analyst with CLSA Capital Partners.
Sanofi, which bought Eastern European branded generics manufacturer Zentiva last year for more than $1 billion, and the private equity firm EQT are also mentioned as potential bidders, although their names crop up less frequently. The Wall Street Journal reports that EQT may team up wit the Icelandic generics firm, Actavis to strengthen its hand.
Novartis isn't a likely contender because its generics subsidiary Sandoz already has high market share and would likely run into anti-trust barriers (a combination of Sandoz and ratiopharm would give it close to 50 percent market share),
Another pureplay generics firm with aggressive international ambitions, Mylan Laboratories, may not have the financing wherewithal to make a big investment in Germany right now, given its long-term debt load of nearly $3.7 billion at the end of 2009, analysts said. Much of the debt is the result of its acquisition in 2007 of Merck KGaA's generics business for nearly $7 billion.
Ratiopharm's troubles, however, pale in comparison to those facing Stada, its competitor, which is also up for sale. Stada, which is publicly held, is carrying a heavy debt load and faces falling revenues and earnings year over year, according to its third-quarter 2009 earnings call, with results dependent heavily on pending tender bids. It is over-reliant on commodity generics, which are being hit hardest by pricing pressures, analysts say.
-Wendy Diller (w.diller@elsevier.com)
This article is reprinted from "The Pink Sheet" DAILY –Jan 25, 2010
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