The announcement last Thursday of Takeda’s purchase of the majority of the assets of Nycomed follows days of press speculation and thus comes as no surprise. According to the official press release, Takeda will pay €9.6n for most of Nycomed, leaving its four private equity shareholders with Nycomed’s US generic dermatology business (for which they should have no trouble finding another buyer). What Takeda is getting, therefore, is around €2.8bn of sales, of which about half comes from western Europe (being the rump of the Altana business that Nycomed acquired in 2007), 17% from Russia and the CIS and most of the rest from Latin America and Asia. In addition, Takeda obtains roflumilast, a novel treatment for COPD that has recently been approved in both Europe and the US. However, it will not get full marketing rights for this product in either of these locations, as it has been out-licensed to Forest for the US and to Merck for the five main European markets plus Canada (although Takeda will be able to co-promote the product with Merck other than in the UK).
Nycomed’s recent financial history has been coloured by the patent expiry of pantoprazole, Altana’s leading product, which has resulted in declining earnings in both 2009 and 2010. However, the rest of the business has been growing strongly, driven by its emerging market business and particularly Russia, where Nycomed is one of the market leaders and has invested heavily in local infrastructure. Elsewhere, western Europe has struggled, consisting as it does of a mishmash of legacy Altana products (including pantoprazole, which still accounts for around half of Nycomed’s European sales).
In Russia, Nycomed’s sales are dominated by Actovegin, a calf-blood extract used for the treatment of cerebrovacular disorders. Nycomed is also the Russian or CIS licensee for a number of other companies, thanks to its strong marketing capability. Important in-licensed drugs include Avonex form Biogen and both Glucophage and Concor from Merck KGaA, while Nycomed has recently signed deals with both GE (for imaging agents) and Eurand (for Zenpep). These products may be a risk following the Takeda take-over, but given that Takeda itself has no real presence in Russia and no imminent launches that would compete directly with Nycomed’s portfolio, we consider this risk to be small. In western Europe, pantoprazole still dominates, while in Latin America it is also important, alongside respiratory products such as ciclesonide.
On an adjusted basis, Nycomed reported a group EBITDA of €851m in 2010. Just considering the part of the business being bought by Takeda, the EBITDA was €765m, which gives an EV/EBITDA multiple for the transaction (which is being carried out on a debt and cash free basis) of 12.6x. This is largely in line with other recent deals that have been done in the sector and does not seem unreasonable given that Takeda ought to be able to create some synergies with its own operations (it expects €260m within three years) and also has some pipeline products that it can put through its expanded infrastructure. According to Takeda, Nycomed should also be capable of showing strong growth on a stand-alone basis, as sales of pantoprazole have pretty much bottomed out and the first revenue from roflumilast (Daxas in Europe) should start to come through this year.
The challenge for Takeda will be to integrate Nycomed effectively into its existing European operations. Takeda itself has no presence in eastern Europe, so the market-by-market consolidation will be focused on western Europe, with the existing Takeda operation more likely to be folded into the Nycomed one than vice versa. Nevertheless, CEE could actually pose the trickiest challenge as Nycomed’s Russian head, Jostein Davidson, could be difficult to accommodate in the Takeda structure. He is used to reporting directly to the CEO and his business unit is both the largest and one of the most profitable in Nycomed, as well as being responsible for most of the company’s growth over the last few years. A veteran of the Russian pharma scene, he has strong government contacts and would be hard to replace, should he decide to leave (which he may well do in any case, given that the working environment inside a Japanese big pharma company will be very different to that in a PE-controlled entity). At his instigation, Nycomed has thrown itself firmly behind the Russian’s efforts to increase domestic drug production and is now spending some €80m on building a production facility in Yaroslavl. As a quid pro quo for this, it expects the Russian government to finally impose European levels of GMP on the local industry and thus prevent low-cost (and low-quality) Russian pharmaceuticals undercutting Nycomed in the market place. However, given that only a tiny fraction of Russian-owned production plants are anywhere near GMP standard, we very much doubt that the current target date of 2014 for plants to demonstrate full GMP or close will be adhered to.
Nycomed does not consider itself to be a generics company (and gets quite upset when described as such), but it’s hard to think of it in any other way given that the vast majority of its sales come from products that have no patent protection. In our view, therefore, buying Nycomed effectively makes Takeda a significant player in the European generics market, albeit one with a branded slant, so there could be some major cultural adjustment ahead.
Posted on 23rd May 2011