Gedeon Richter considering next move

Analysis

Following the collapse of Gedeon Richter’s attempt to buy Polpharma, the Hungarian group is now facing the prospect of coming up with a new strategy for growth.

Analysts widely believe this means the group is set to remain on the acquisition trail, and a look at companies in the region shows that there are many opportunities to buy into strong growth rates.

The acquisition of Polpharma would have cemented Gedeon’s position as one of the fastest growing companies in Central and Eastern Europe, and for that reason the failure of the deal is a disappointment. Because the deal was widely considered to be in the bag, most analysts were including the new Polish business, and a Russian generics outfit called Akrihin, partly owned by the holding company behind Polpharma, in their models.

The new businesses added around 25%-35% to top line consolidated group sales forecasts over the next five years, illustrating how significant the move was to be. Analysts were forecasting compound annual growth of 21% through 2012, to $3.06bn. The group reported $1.22bn last year. Last year, prior to news of the deal, analysts were assuming 2012 sales of $2.45bn.

As a result, long term forecasts will now be reined back in, which can partly be to blame for the drop in Gedeon’s share price at the beginning of the week, although it has largely recovered since.

On the plus side, while disappointing for longer-term growth, short term the group will be shielded from a dilution to earnings. Plus, the reason the deal has failed is reportedly because the owner of the Polish group demanded more control over the larger group, which could now trigger the payment of a $40m break fee.

Fire power

That $40m would add to the $300m or so of cash that Gedeon Richter has on its balance sheet, which carries very minimal debt. That gives the group the fire power to start thinking about its next move.

The group is active in both specialty and generics, and assuming it wants to stay within its comfort zone, EvaluatePharma’s Peer Group Analyzer throws up a number of possibilities.

    CAGR 2007-2012 2010 forecasts  
($m) Enterprise Value Revenues Net income  FCF yield  Revenues Location
Krka 4,993 18% 21% 5.0% 1,980 Slovenia
Bioton 814 43% 54% 3.3% 426 Poland
Egis Pharmaceuticals 720 15% 27% 8.2% 808 Hungary
Sopharma 669 9% 14% 2.4% 140 Bulgaria
Sanitas 584 15% 32% 10% 233 Lithuania
Veropharm 549 18% 21% 5.7% 250 Russia
Antibiotice 268 11% 11% 1.1% 122 Romania


The biggest is Slovenia’s Krka, a significant generics player already, and possibly too big for Gedeon to consider, which currently has an enterprise value of $3.35bn. Still, a tie up between the two would create a significant power house in the region.

Polpharma’s peer Bioton would be an interesting specialty play, as it derives the majority of its sales from insulin and antibiotics. Recent acquisitions in Russia, China and Ukraine are set to help drive growth.

Hungarian specialty and generics group Egis Pharmaceuticals would add a number of smaller but fast growing products, although would not give the geographical expansion that maybe Gedeon is seeking. Its biggest growth drivers are an ACE inhibitor Coverex and a gout treatment called Milurit.

Sopharma, Sanitas and Antibiotice are small generics groups in Bulgaria, Lithuania and Romania, respectively, which could add to Gedeon’s own business in this field.

Russia’s Veropharm claims to be the country’s fifth biggest generics player, and is particularly dominant in cancer drugs. Potential difficulties in buying a Russian company could deter activity here.

Hunter the hunted

With commentators believing the chances of the Polpharma deal going through now very unlikely, executives at Gedeon Richter are likely to be well on the way to considering their next moves. Interest in generics companies in the region has been mounting for some time, the interest in Zentiva from Sanofi–Aventis and private equity groups amply illustrates this. (See EP Vantage analysis: Sanofi's bid for Zentiva creating a new M&A trend? June 18, 2008)

Because of the growth in the area, Gedeon is likely to have other plans on the boil. However, considering the Hungarian government’s '25% plus one share' blocking stake in Richter expires in September next year, the possibility that the hunter finds itself the hunted in the future is a distinct possibility.

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