CSL's acquisition of Talecris thwarts another sector IPO

Analysis

Considering large healthcare companies' poor track record recently in actually completing an IPO before succumbing to a takeover bid, and the fact that Talecris Biotherapeutics already failed to float once, it is not incredibly surprising to hear that the blood plasma group is to be bought by Australia’s CSL for $3.1bn.

CSL’s swoop on the company before its second IPO attempt follows Schering-Plough’s acquisition of Organon BioSciences, a day before the shares floated, and GlaxoSmithKline’s swoop on Reliant, which was also preparing to go public. If it is good enough for the public markets, it is clearly good enough for a bigger competitor, particularly as many of them are struggling to maintain growth rates.

The Australian company's move is slightly different, in that it is in the blood plasma sphere, rather than pure drug development, and looks to have been executed to grab market share. It will also help future earnings, as CSL is more profitable than Talecris, and should be able to grow the US company’s margins to similar levels. The group is anticipating synergies of $225m a year, to be realised over three years.

EvaluatePharma has created a virtual merger of the two companies, and a profile of the new group can be seen at CSL-Talecris. It reveals that based on consensus forecasts, the new entity is seen having total revenues of $8.90bn and earnings of more than $3bn in 2014. Gammar, CSL’s immune globulin product, is set to be by far the group’s biggest selling product, with 2014 forecasts at $2.05bn, followed by Talecris’ Gamunex IGIV, a similar immune globulin, with sales seen at just over $1bn.

Talecris will originate two of the group’s five biggest growth drivers over the next seven years, Gamunex IGIV and Prolastin, a protein used in AAT congenital deficiency. However, the two operators have several therapeutic overlaps, for example both have anti-thrombin III anti-coagulant, factor VIII and human albumin products, not to mention the two top selling products, Gammar and Gamunex IGIV; illustrating the capacity to cut costs.

The table below shows a peer group of blood plasma companies, highlighting how Baxter will still dominate the field in the coming years, although not all of its sales are derived from blood plasma products. The table also illustrates the rationale behind the CSL-Talecris deal, showing how EBITDA margins will improve over the first two years alone, putting the company on track to become one of the most profitable companies in the field.

Blood plasma peer group          
    Total Group Sales ($m) EBITDA margin
  2007 2010 CAGR 2007 2010
     Baxter International 11,263 14,011 8% 25.5% 27.4%
     CSL-Talecris 4,504 6,438 13% 26.8% 34.1%
     CSL 3,201 4,847 15% 30.9% 35.5%
     Octapharma 1,031 1,702 18% 33.7% 33.8%
     Grifols 964 1,588 18% 25.4% 33.1%
     Talecris Biotherapeutics 1,219 1,540 8% 16.7% 16.3%
     Biotest 448 782 20% 16.8% 15.7%

Past and future consolidation

It had been suspected that the private equity owners of Talecris had wanted a sale over an IPO. If that is true, the $3.1bn price tag represents a good return on the $300m paid for the company three years ago. Of today’s price tag, around $1.2bn is debt.

The move also represents a neat circle for CSL, which has grown its blood plasma business through acquisition over the last few years. Talecris was formerly a unit of Bayer, which in 2003 was proceeding with a plan to merge the business with Aventis’s plasma unit, Behring. In April 2004 CSL bought Aventis Behring for $925m, and the merger fell through; Talecris was then sold to private equity.

Four years later, CSL now owns both businesses. With the blood plasma industry forecast to grow at 10% a year, an enviable rate for the sector, the peer group listed above could become even shorter in the future.

Smaller companies such as Octapharma may decide it is their time to consolidate positions at the bottom end of the pile. With another cancelled IPO in the area, Kedrion, only last month, blood plasma is an area that will continue to see activity in the coming years.

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