Is Stada on the block, again?

With healthcare reform seemingly all the rage, Germany’s ministry of health unveiled plans today to reduce the cost of patented drugs, placing further pricing pressure in one of the toughest healthcare markets in Europe.

Understandably this is not good news for Germany’s innovative healthcare companies; the Prime Xetra Pharma and Healthcare Index was down 1% today. Surprisingly, however, German generics group Stada Arzneimittel is one of the biggest fallers so far, shares down 2%, although the most likely explanation could be that investors are using this opportunity to take profits. Stada’s stock has risen almost three-fold in the last 12 months, admittedly from an eight-year low base, suggesting that perennial takeover rumours are gathering momentum again with Pfizer touted as a potential suitor given its failure to land Ratiopharm (Teva triumphs in 'must-win' battle for Ratiopharm, March 18, 2010).

Recovery gains

Over a four-year period from the middle of 2004 to mid-2008, Stada had been impressing investors and analysts with its growth story as its shares more than tripled in value. However, that run came to an abrupt and dramatic end in July 2008 when the extent of the price cuts and fierce competition in the German market delivered a severe body blow to Stada.

Just prior to Stada’s profit warning in 2008 (Stada failing to reassure that the worst is over, August 14, 2008), its shares were trading at around €48, but thereafter went into freefall until March 2009 when they hit an eight year low of €10.70.

However, the last 12 months have seen Stada’s shares recover the bulk of these losses and before today’s dip they touched a 12-month high of €30.58, valuing the group at €1.8bn ($2.39bn).

Yet throughout all these highs and lows one constant has remained, that Stada is a viable takeover target for either a bigger generics group, such as Teva, or big pharma, with the likes of Pfizer, Sanofi-Aventis and Novartis often mentioned in rumour mill dispatches.

On the block?

Following Teva’s acquisition of Ratiopharm, Stada and another of Ratiopharm’s bidders, Actavis, are left as the two largest independent European generics companies.

European Generics WW Unbranded Generic Sales ($m)
2009 2014 CAGR (09 - 14)
1  Novartis (Sandoz) 6,677 8,855 6%
2  Actavis 2,433 3,889 10%
3  ratiopharm (Teva) 2,795 3,832 7%
4  Sanofi-Aventis (Zentiva) 1,410 2,263 10%
5  STADA Arzneimittel 1,601 2,001 5%
6  Pharmstandard 590 939 10%
7  Alapis 299 777 21%
8  Sanitas 174 226 5%
9  Veropharm 109 219 15%
10  Sopharma 125 167 6%
11  Bioton 63 125 15%
12  Antibiotice 69 122 12%

Teva’s purchase of Ratiopharm, propelling the world’s biggest generics group to the number one spot in Europe as well, will undoubtedly ratchet up the pressure on the likes of Actavis and Stada.

The end game and strategy for private Icelandic group Actavis, appears somewhat confused, alternating over the past two years from being up for sale to seeking major acquisitions itself.

As for Stada the company appears to be gradually getting back on track; although total group revenues declined 5% last year to €1.57bn this result and improved margins were better than many analysts had expected.

In terms of takeover potential, Reuters reports that Stada’s shares are protected under a special German securities law to ward off hostile or unsolicited bids, suggesting that only a friendly offer at a significant premium would be successful.

Pricing a deal

The $5bn (€3.6bn) price paid for Ratiopharm equated to 2.2 times sales of the private German group; a similar multiple for Stada could value it at around €3.45bn, or €59 per share, almost double the current share price.

Pfizer’s involvement in the auction process for Ratiopharm clearly indicates the US pharma giant is serious about entering the European generics scene, and some analysts have suggested Stada may even be a more suitable fit than Ratiopharm, given Stada’s greater presence in emerging markets.

But if Pfizer baulks at potentially having to pay a hefty premium for Stada, another option could be a potential tie up between Stada and Actavis.

Combining the two medium-sized generics groups could create a company with a much more meaningful and critical market share in Europe and the increasingly important emerging markets. A Stada-Actavis tie up would certainly enable it to compete much more effectively with the likes of Teva and Sandoz.

Either way, the perennial Stada takeover rumours are unlikely to evaporate any time soon.

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