UCB far from rehabilitated, despite divestment and study success

Analysis

UCB’s $1.2bn sale of Kremers Urban to Lannett marks the end of the Belgian group’s presence in generics, but despite this and a recent pivotal trial success the company’s problems are far from over.

Still in desperate need of attention, for instance, is UCB’s capital structure, a hangover from its pre-credit crunch acquisitions. Clearly the proceeds of the Kremers sale will reduce indebtedness, but already there is one glaring indication that UCB could have got a better price for Kremers: Lannett stock today opened up 17%.

Certainly, at just 9.2x pro forma Ebitda for the period ended June, the Kremers price tag looks undemanding. Then again, UCB was probably desperate to unload the business, having tried and failed to sell it to private equity last year, and jumped at an offer that was in the same ballpark as the $1.5bn that Advent and Avista Capital had been willing to pay in November.

That deal fell apart a month later when the US FDA deemed Kremers’ generic version of Johnson & Johnson’s Concerta not automatically substitutable; should the substitutable AB rating be restored – this depends on the outcome of a bioequivalence study – UCB will become eligible to a share of the drug’s profits.

Capital problems

This morning analysts at Bryan, Garnier wrote that UCB’s transition to a pure speciality pharma group was clearer, neatly glossing over a capital structure that needs tidying up.

Consider, for instance, that the group last year repaid €575m ($639m) worth of bonds but took on €384m of new borrowings, managing to pay out €222m in dividends at the same time as reporting a net profit of just €209m. It had cost UCB no less than €215m to service its debt, which before factoring in the Kremers disposal stood at €2.1bn gross.

Much of this mess comes from two big, pre-crunch acquisitions: a $2.7bn takeover of Celltech, and the $5.6bn buyout of Schwarz Pharma, which brought with it the Kremers business.

Beyond Kremers what has UCB to show for the $5.6bn Schwarz move? Schwarz’s two key assets, Neupro and Vimpat – once seen as near-certain blockbusters – generated sales last year of €200m and €471m respectively, and the latter faces the threat of generic competition.

Elsewhere in its pipeline UCB has suffered failures, most recently that of the lupus project epratuzumab. Tuesday’s phase III success with romosozumab is an oasis in the desert, and this osteoporosis agent is now one of UCB’s key assets.

900%

No such problems for Lannett, of course, which has quietly emerged as one of the most important generics companies to watch. The group’s stock is up over 900% in the past three years, and probably the main reason why it has not yet been acquired is that over 35% of the shares are held by its chairman, William Farber, his son Jeffrey Farber (vice-chairman), and members of their family.

In May Lannett bought the private generics business Silarx Pharmaceuticals, and reckons that even after the debt-funded purchase of Kremers it will have enough firepower for further M&A. Kremers will diversify and double Lannett’s sales, with expected cash flow aiding debt repayment.

The enlarged Lannett will leapfrog Impax and Akorn to become the biggest-selling US-listed, sub-$10bn market cap generics player, extending its reach over Sagent and ANI Pharmaceuticals.

The likes of Valeant and Allergan are acquiring like there’s no tomorrow, so it is a safe bet that all of the above will appear in deal bankers’ pitch books.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobPlieth on Twitter

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