It was announced in May that the US specialty pharma company, Valeant, had agreed to buy the Lithuanian drug company Sanitas for €314m, a deal that is expected to close by the end of Q3 this year. At its Q2 results conference call last week, however, Valeant came under considerable pressure from analysts concerning an FDA warning letter that had been received by Sanitas’s Polish subsidiary, Jelfa. In the letter, the FDA highlighted a number of deficiencies and suggested that Jelfa had deep-rooted problems, with its quality department simply not being up to the job. In response, Valeant’s CEO, Michael J Pearson, said that Valeant had no intention of exporting products from Jelfa’s Jelenia Gora site to the US and, furthermore, that following the closure of the Sanitas deal Valeant would have four production facilities in Europe, which was more than it needed. The clear implication of this last remark was that it intended to close Jelfa’s plant (and, presumably, shift production to Łódź, where it has a more modern topicals facility, built after it acquired Emo-Farm in 2009). As for the issue of whether the issues highlighted by the FDA might also cause problems with the European regulatory agencies, he did not give a direct answer.
As we noted in our news update of May 24th, when the Valeant/Sanitas deal was first announced, consolidation of production is about the only way that Valeant can achieve any synergy benefits from Sanitas, since its usual policy of cutting the R&D spend of acquired companies would have little impact on a target that already spends almost nothing on research and development. However, as we also noted, what makes sense on paper could be extremely difficult to achieve in practice, as Valeant may be about to find out. The Polish pharmaceutical industry remains highly unionised and there will be enormous resistance to the closure of the Jelfa facility, which employs more than 400 people in a region that is more generally known for tourism than heavy industry. In addition, shifting production from one site to another is neither easy nor quick, with two or three years likely to be the shortest possible time period in which it could be achieved. We also assume that the Łódź plant would have to be significantly expanded in order to accommodate Jelfa’s full product range, as Jelfa’s output is some 30m tubes annually whereas Emo-Farm appears to make a relatively narrow range of products.
Apart from the immediate issue of whether or not Jelfa would be able to continue production in the face of the FDA’s warning letter, analysts also voiced concern that Valeant’s quick-fire succession of acquisitions might be resulting in it being unable to conduct full due diligence, such that it was simply unaware of the situation in Jelenia Gora. Naturally, Valeant’s management refuted this, but it is nevertheless a fact that one of Valeant’s known bidding tactics in competitive auctions (which it generally prefers to avoid, if possible) is to pre-empt the process by putting in its final offer while other bidders are still working their way through the data room etc… It is therefore possible that some due diligence items get overlooked in the rush to secure the target and only emerge later on. Of course, as Valeant has not yet completed on Sanitas, it could still walk away, something that it might want to consider if, as has recently been rumoured in the press, it is trying to strike a much bigger deal with Meda, the Swedish specialty pharma player.
Posted on 8th August 2011