Valeant is back on the acquisition trail, announcing today that it is paying approximately €314m for the Lithuanian pharma company Sanitas. Sanitas, which reported turnover of €98m in 2010, generates 50% of its revenue in Poland (where it owns Jelfa, a specialist in liquids and creams with a strong dermatology franchise) and 15% in Russia (mainly selling Jelfa products), as well as having a strong presence in the Baltics, particularly Latvia. Reported EBITDA in 2010 was €28.6m which, taking into consideration the €55m of net debt that Sanitas had on its balance sheet at year end, implies an EV/EBITDA multiple for the transaction of 12.9x. This is not out of line with other deals that have been done in the European generic industry recently, but represents a premium price given Sanitas’ rocky profit history, old product range and limited pipeline. The deal is therefore a good result for the company’s PE shareholders (who own 87.2% of the company), who tried unsuccessfully to sell out in 2008 at a much lower price, albeit off pretty much the same EBITDA number. Equally, it is positive for the smaller shareholders (Sanitas is quoted on the Vilnius Stock Exchange) who will get paid the same valuation for their shares in a mandatory tender offer that should be completed the end of Q4.
It has been suggested in the press that an important part of Valeant’s historic acquisition strategy has been its ability to cut costs in its acquired companies and hence justify the high earnings multiples that it has paid on entry. Irrespective of whether this is actually the case in general, Valeant is likely to have trouble achieving this at Sanitas, which has negligible R&D spend (an easy target for cost-cutting) and is struggling with low capacity utilisation at its two manufacturing facilities. Valeant itself already has three plants in Europe, including two in Poland, but the prospects of closing any of them are remote. Sanitas’ facilities are quite specialised (liquids and creams in Poland, steriles in Lithuania) and although Valeant already has a topicals plant that it acquired with Emo-Farm in 2009, the Polish unions will certainly strongly resist any job losses. The Polish sites are also spread across the country, with Jelfa being situated closer to Prague than Warsaw, Emo-Farm at Łódź and Valeant’s Polfa Rzeszów unit almost in Ukraine. In any case, Sanitas already has EBITDA margins of more than 30% and if anything, needs to invest more in its marketing and new product development, given that its shareholders have largely forced it to focus on cash in an effort to get its debt down following the financial crisis.
Fortunately for Valeant, one of the genuine benefits of an acquisition-led strategy is that you rarely have to explain why historic deals have failed to deliver, since analysts never get the chance to compare like-for-like numbers. Sanitas is in any case small beer by Valeant’s standards, allowing it to look busy while it searches for something much more substantial to buy, having been deprived of Cephalon by Teva. All of which must be rather depressing for Sanitas’ management, if not for its former owners.
Posted on 24th May 2011