Mylan’s July announcement that it planned to acquire Abbott’s developed markets business looked like the start of a possible series of deals between big pharma and generics companies, but the survival of the transaction appeared in doubt following AbbVie’s decision to back out of its Shire purchase after a change in the US tax law. Now, however, there has been some renegotiation of the terms and it seems that Mylan will go ahead with the purchase. As the deal stands, Mylan will pay c$5.5bn to buy Abbott’s operations in the EU, Canada, Japan and Australia/NZ, which collectively had turnover of $1.9bn in 2013 and employ 3,800 people, mainly in marketing. Two manufacturing facilities are also included, in France and Japan. The ‘adjusted’ (whatever that means) EBITDA of the business is $600m, implying an EV/EBITDA ratio for the transaction of just over 9x. Compared to recent acquisitions in the pharma space, this is relatively modest, but it reflects the fact that Abbott’s sales in the developed markets have been declining in single digits over the last few years. Moreover, Abbott is taking Mylan stock rather than cash, turning it into a 22% shareholder (temporarily – there doesn’t appear to be any lock-up) and leaving Mylan’s balance sheet intact. Thanks to the structure of the deal, which involves Mylan backing into a Netherland-based holding company into which Abbott will place the assets being sold, Mylan also hopes to knock several percentage points off its overall tax rate, a move that should just about survive the new US tax rules.
The Abbott portfolio is basically a hodgepodge of old brands that have come from the company’s various acquisitions, particularly of Solvay’s pharma business in 2009. In general, the patents on these products expired years ago and they have reached a stable state in terms of volume sales, with prices ticking down as a result of government-mandated cuts. The biggest therapeutic area is cardio-metabolic, which accounts for 30% of sales and this is followed by GI (21%) and anti-infective/respiratory (17%). Key products are Klacid (clarithromycin), Creon (pancreatin) and Teveten/Teveten Plus (eprosartan, alone or combined with HCT).
Mylan stated in July that this deal is a great opportunity and we are inclined to agree. While we greatly doubt Mylan’s assertion that it will be able to return the Abbott portfolio to growth by using its contacts with the pharmacy channel to supplement the efforts of the Abbott salesforce with doctors, we suspect that there is huge scope for cost-cutting within the Abbott organisation. For a start, what on earth are the 2,100 sales reps (1,300 in Europe, 560 in Japan, 100 in Australia/NZ and 140 in Canada) actually promoting? While there are definitely some developed countries that require a sales force – and Abbott’s biggest markets, Japan (19% of turnover) and Italy (13%), are two of them – many of them do not and in any case, Mylan already has a Japanese sales force (via its jv with Pfizer) as well as a sizeable operation in Italy. The fact that Mylan’s CEO, Heather Bresch, referenced the company’s previous major European acquisition, that of Merck generics, is probably more telling than she realises. From an industrial perspective this deal was a failure: sales have declined substantially and Mylan has never managed to build out the operation much beyond France, the UK and Italy (and the UK operation has dwindled alarmingly over the years). From an EPS perspective, however, it was massively successful, providing years of growth as Mylan reaped the benefits of restructuring. Abbott is likely to be much the same, albeit that sales should hold up a bit better. It also provides Mylan with a platform in markets such as Germany, Spain and the Nordics, which will be useful when it starts to launch its respiratory and biosimilar portfolios later in the decade.
On the conference call held to discuss the deal with analysts, Robert Courey, Mylan’s Chairman, said that the company had looked at a number of big pharma portfolios but that Abbott was by far the best that they had seen. He added, though, that Abbott was only a start and that Mylan would be looking for additional products to bolt on to its existing infrastructure (and that he believed that Mylan could return these, too, to a growth trajectory). In our view, there is definite potential to build out the Abbott network, but Mylan needs to be a bit cautious about its own abilities when it comes to halting the slide in sales of most big pharma companies’ established products. The great thing about the Abbott portfolio is its extreme age, but this sets it apart from the established product divisions of most of the other big pharma companies, which are generally dominated by products that have either lost patent protection recently or else are just about to hit generic competition. In most cases, these products are doomed to decline until they reach some kind of equilibrium with generics and there is nothing that any company can do to stop them. Even older products will be subject to downwards pricing pressure in most markets, with the result that volume growth is the only option to expand sales. Generics companies do have some advantages here, since they can probably achieve a better COGS than the originator and they are not so restricted by centralised views of pricing, which gives them more flexibility to, for instance, compete in tenders and lift volumes that way. But it’s not going to be that easy.
There are quite a few big pharma companies out there with portfolios that they would like to offload and a similar number of generics firms with cash to spare, but we do not necessarily see a great fit between the two. Big pharma likes very new drugs that offer organic growth and generics companies are happy with very old ones, which offer predictable cash flow and stable revenues, but neither is very keen on products that fall between the two. Really, this ought to be the province of private equity, which ought to be able to take a view on where sales will bottom out and value the portfolios accordingly, selling then on once they have reached a steady state. However, buying products in steep decline takes a lot of nerve and most PE houses appear to prefer more certain investments, so big pharma may be stuck with some of these brands for longer than they want.