Hikma announced today that it is spending $112m to acquire Baxter’s US generic injectables business, propelling it to the number two position in the US market (measured by volume) after Hospira. In unit terms, Hikma now has a 16% market share, vs 1% previously and it has also more than doubled the size of its entire injectables division.
For what appears to be a relatively modest sum, Hikma is getting a portfolio of more than 41 products in 150 presentations (including a number of controlled drugs) with a total turnover of close to $180m. It also adds 20 sales reps to its existing team of eight and gains a production facility at Cherry Hill, NJ that specialises in high-speed vial filling.
In 2009, the Baxter business had total sales of $170m and an EBITDA of $14.5m. Assuming that the implied EBITDA margin of 8.5% is maintained in 2010, Hikma will be paying an EV/EBITDA multiple of 7.3x, which appears very low. This number is somewhat deceptive, however, as Hikma needs to invest $25-30m in the plant (implying a purchase multiple of just over 9x once this is added in) and is also not getting any pipeline, just the existing products. The fact that Hikma has a strong development pipeline itself but lacked sales strength is probably one reason why it was well positioned to win the auction. Another reason appears to be its willingness to invest in the business rather than just taking the products and closing the manufacturing site (which has more than 700 employees), which is what established players such as Teva and Sandoz would presumably have done.
In the short term, the biggest benefit that Hikma will gain from the Baxter deal is far greater clout with customers such as wholesalers and hence a significantly better market share for its new product launches. Over the longer term, there should also be a lot of scope to improve margins in the US, which are extremely low compared to Hikma’s base business. Hikma expects its enlarged US injectables franchise to grow sales by around 10% pa for the next few years, so higher volumes alone should help capacity utilisation, but the company also sees considerable scope to optimise production by moving products between Cherry Hill and its existing site in Portugal. Hikma’s ultimate aim is to get EBITDA margins in the US up to 14-15%, which ought to be achievable but will probably take some time.
The Baxter deal is expected to close at the end of this year, so we have incorporated it into our forecasts for Hikma from 2011 onwards. Management expects the deal to be accretive immediately and our model supports this, suggesting that EPS will rise by around 7% in 2011 and 8% in 2012. Overall, we believe that this is an excellent move by Hikma, as it has turned its injectables operation into a true global player with real substance in the US, while leaving the company plenty of cash to use on other deals.