Richter announced today that it is acquiring the oral contraceptive assets of Gruenenthal, a private German company. This is Richter’s second transaction in a month – and its last for some time, according to management. Under the terms of the deal, which will close as soon as clearance is received from the German competition authorities, Richter will pay €236.5m for a portfolio of seven brands that had turnover in 2009 of €72m. In addition, it will take on Gruenenthal’s women’s health sales force in Germany and Italy (which, along with Spain, are the key markets for the lead product in the portfolio, Belara).
In contrast to the purchase of Preglem (announced October 8th), this deal will be earnings accretive rather than dilutive. The acquired products have gross margins of more than 80% and this should increase further once Richter transfers production to its own facilities, which is expected to take up to 18 months. Turnover of the products, which has been static over 2007-2009 and is expected to fall somewhat this year due to a lack of promotion by Gruenenthal and the maturity of the drugs (Belara was launched in 1999 and is already the second largest OC brand in Germany) should pick up again as Richter puts in more marketing effort and takes back Belara from licensees in CEE and the CIS. Marketing costs for the portfolio are estimated at €15m, assuming around 100 reps across Germany, Italy and Spain, so the Gruenenthal drugs could eventually generate in excess of €50m pa in EBITDA to Richter (and €25-30m in net profit, assuming amortisation of €15m pa, since Richter pays almost no tax and the cash that it will use to fund the deal was not generating a high rate of interest).
As we noted in our October 11th report on Richter (‘One small step, but still a giant leap’), Preglem could only ever be thought of a first move into western Europe and Richter still had a strong need to buy products, both to give it immediate sales and to counter the dilutive impact of Preglem’s R&D spend. This deal partially achieves both of these aims. Richter will still have to invest in infrastructure in France (where we assume that it was in the bidding for Theramex but wasn’t ready to pay as much as Teva) and the UK, as well as completing the sales team in Spain, but at least it now has reps in three of the ‘big 5’ EU markets. This gives it a means to market Preglem’s products and also some of its own, particularly its generic verson of Bayer Schering’s Yaz, which Richter has already partnered in some western European territories, but not all. As for the dilution, the Gruenenthal portfolio will mitigate this but not remove it – we still estimate that EPS in 2012 will be about 16% below where it would have been if Richter hadn’t bought either Preglem or the Gruenenthal OC products. Shareholders therefore need to continue to be patient.