The recent announcement by Takeda that it is paying $800m (plus an undisclosed earn-out) to acquire the private US pharma company URL, is a reminder that there is money to be made by private equity in generics. It also offers a big clue as to the best way to maximise returns – focus more on branded specialty pharma products and less on pure generics. Takeda’s motivation in buying URL was to get hold of Colcrys, a treatment for gout that complemented products in its own portfolio, not to become a US generics player. Similarly, Endo was persuaded to buy another US generics firm, Qualitest, from Apax in 2010, because of its strong presence in the market for pain treatments. As far as we can tell (given that the full financial details of the transactions were not made public), both Takeda and Endo paid pretty full prices, showing that it is possible to get a specialty pharma valuation for generic assets, provided that you can make them look sufficiently differentiated.
In general, the biggest problem that private equity investors have in generic (or any) pharmaceuticals is not making a return, but finding assets to buy in the first place. Any half-decent company is likely to attract trade bidders who will generally be willing to pay more than PE. This is partly because industrial investors’ investment criteria tend to be more modest (earnings accretion alone is often sufficient for quoted companies) and partly because they are able to create financial synergies by integrating the acquired assets with their own. As a result, unless the vendors specifically want to bring in private equity – for instance, to help them restructure prior to a final sale to trade – PE bidders generally lose auctions. The exceptions are situations in which PE either bids very high (spotting an opportunity not visible to trade or, conversely, failing to spot a major weakness that is apparent to trade) or where the target itself is one that nobody else wants. The latter category includes companies that are fundamentally unattractive due to their mix of business and also those that are in risky or difficult locations. A decade or so ago, most of the world’s emerging markets were considered unattractive places to buy companies, which has enabled astute private equity investors to make massive returns as these countries became fashionable investment destinations. Advent, for instance, was able to sell the Romanian company Terapia in 2006, after only two and a half years of ownership, for more than six times the amount that it paid for it. Timing is everything, however. CVCI recently put three emerging market companies on the block and only managed to sell one of them, Sanitas (a predominantly Polish company based in Lithuania). The other two – Biofarma in Turkey and Amoun in Egypt – were left unsold, the former due to unrealistic price expectations in a deteriorating market environment and the latter thanks to the Arab Spring, which reminded potential buyers of the downside of emerging markets. Ironically, Sanitas probably had the least attractive asset mix of the three and would almost certainly have wound up in the hands of a second set of PE investors had Valeant not decided to start hoovering up assets in Europe and offered a price that was well in excess of any rational expectations.
Finding countries where pharma companies are wary of investing and yet that have future potential is not so easy these days, which leaves PE mostly focused on assets that nobody else wants. Hence the purchase of the UK companies Martindale and Goldshield (now renamed Mercury Pharma) by AAC and Hg respectively, in early 2010. Or, further back in time, Advent’s purchase of Viatris from Degussa in mid 2002. All three companies consisted of a mish-mash of assets and were unable to attract trade bidders that were sufficiently interested in all the pieces. In the Viatris case, Advent disposed of non-core assets, cut costs and improved the portfolio, creating a much simpler company that it was able to sell to Meda three years after the initial purchase, for twice what it paid initially. AAC and Hg have not yet attempted to sell but are likely to do so relatively soon, having effected their own clean-ups. The financial investors in URL took a bit longer – they injected some $30m into the company back in 1997 when it was close to bankruptcy. Qualitest, on the other hand, was a relatively short-term investment for Apax, which bought and sold it within three years. For most of that time, it appeared that Apax was going to lose money on the deal, having gone the high-price route (it is believed to have paid around $850m) and then found that Qualitest was in far worse shape than it had anticipated. New management was brought in and the business restructured, but it was Endo’s interest in the pain franchise that enabled Apax ultimately to sell out for $1.2bn and make a positive return.
What all this goes to show is that with a bit of effort and ingenuity (and luck), financial investors can convert low-value generic assets into something much more attractive and valuable. Not that every transaction works out (witness CVCI), but the potential is clearly there.