Valeant announced today that is paying €350m (plus a possible further €30m) to acquire PharmaSwiss, a privately-owned company based in Zug. According to Valeant’s CEO, J Michael Pearson, PharmaSwiss is a ‘generics and OTC’ player operating in 19 countries and with a broad portfolio spread across seven therapeutic categories, that will ‘solidify [Valeant’s] position as a leading central and eastern European pharmaceuticals company’. In our view, PharmaSwiss is a well-run company that has done a very good job of building a business with turnover of more than €180m pa in only ten years (it was founded in 2000), but that does not prevent Mr Pearson’s statements being somewhat misleading. To begin with, PharmaSwiss is not a ‘generics and OTC’ company as such – only around 10% of its turnover comes from its own portfolio of products. All the rest is derived either from products that have been in-licensed or, more commonly, are being distributed and promoted by PharmaSwiss but are owned by other companies. A third of PharmaSwiss’s revenues come from BMS products, for instance, with another 17% from Wyeth drugs.
Then again, while PharmaSwiss genuinely does have a presence across CEE (but not in Russia or the CIS), fully half of its turnover comes from Serbia, which was where it started its operations, and a further 25% from other Balkan countries such as Croatia, Slovenia and Greece. It could thus be more accurately described as a Balkan company than a CEE one. Of course, it will indeed strengthen Valeant’s position in CEE, but that position could by no means be described as ‘leading’, either before or after the deal. Ironically, back in the days when Valeant was still ICN and run by Milan Panic, it genuinely was one of the biggest western investors in central and eastern Europe. However, after Mr Panic was ousted, the new management sold off Valeant’s CEE operations, starting with the ones in Russia (which became the core of Pharmstandard, now Russia’s largest pharma company) and culminating, in 2008, with the disposal of almost all that was left in both West and East Europe to Meda, for $428m. The only part of Mr Panic’s former empire that Valeant held on to was in central Europe, with the biggest chunk being Polfa Rzeszow in Poland. Total turnover from CEE in 2009 was just under €110m, which is not much more than a tenth of the revenues of the real regional leaders such as Krka or Gedeon Richter.
Valeant’s existing operations in CEE are expected to come under the management of the PharmaSwiss team once the deal completes and it is easy to see why the PharmaSwiss shareholders found the transaction so compelling. From a business perspective, Valeant gives them a proper sales base in all the CEE markets where they were weak before, plus the prospect of a pipeline of new drugs, both generic and innovative. And from a financial perspective, €350m implies a vastly higher valuation (15.9x 2009 EBITDA of €22m, taking into consideration cash in the bank of €38m) than PharmaSwiss would have been likely to achieve at IPO, which was the alternative that the shareholders (the founders plus two PE firms) were considering. From the Valeant side, the logic is rather less clear. It can be argued that there are relatively few assets available in CEE, let alone ones that cover multiple markets, but there has to be a risk in buying an operation whose sales are so heavily weighted towards distribution and whose partners could potentially walk away. Not to mention taking a big position in Serbia, which hit the headlines recently when Stada made big write-offs following the collapse of the leading local distributer. But then, Serbia was where Mr Panic made his first foray outside the US, when in 1991 he bought a 75% stake in Galenka, which was then the leading pharma company in Yugoslavia, so perhaps Valeant is just going back to its roots.
Posted on 1st February 2011