When debt is easily available – even to lossmaking small-cap companies – an obvious plan is to follow in Valeant’s footsteps, gearing up to finance buy-outs of speciality drugs. Just look at Aralez, which after a remarkable rise from the ashes of Pozen is pursuing precisely this strategy.
The latest piece fell into place today, with a $175m deal to buy AstraZeneca’s off-patent beta-blocker, Toprol-XL. This came shortly after a separate product launch and a smaller acquisition, and would not have been possible without Deerfield providing the group with ready cash.
Deerfield was the driving force behind Aralez’s formation last year from the merger of Pozen and Tribune, and has allowed Aralez to chase its speciality pharma dream – providing $75m in the form of a 2.5% convertible, for instance.
It made up to $200m of additional debt available for acquisitions like those of Toprol-XL today, and Zontivity, from Merck & Co, in July. After closing the Toprol-XL deal and yesterday’s launch of Yosprala, Deerfield will provide Aralez with up to $250m more to fund further acquisitions.
This is where the interest payments spiral to around 12.5% for both the earlier $200m and the latest $250m debt tranches, Aralez said. The group’s market cap stands at barely over $300m.
Aralez’s formation was partly financed by QLT, and Deerfield is also one of the backers of QLT’s proposed takeover of Aegerion (QLT and Aegerion put each other out of their miseries, June 16, 2016). The QLT/Aegerion deal, to form a company called Novelion, was initially to be completed in the third quarter but has been delayed by up to three months.
However risky gearing up a loss-making entity might be in the long term, the market loves debt being put to immediate use: Aralez equity opened up 12% this morning.
Through the deal Aralez gains not only Astra’s own Toprol-XL, an extended-release metoprolol formulation, but also Par Pharmaceutical’s authorised generic. EvaluatePharma’s sellside consensus is for these drugs to sell $85m this year, down from $89m in 2015, plateauing at around $30m a year by 2020.
Metoprolol itself has long been available generically, and the extended-release version came off patent in 2006. Interestingly, however, the key to the Aralez deal seems to be the difficulty of genericising the newer form.
Toprol-XL generics were initially launched by the Allergan predecessor company Watson, Mylan, Wockhardt, Dr Reddy’s, Novartis’s Sandoz division and KV Pharmaceutical. However, manufacturing problems caused all but Watson – and Par’s authorised version – to be pulled from the market. Thanks to this Astra was still able to record Toprol-XL sales of $700m in 2009, 17 years after its first launch.
EvaluatePharma’s calculation of Toprol-XL’s NPV stands at $172m, very close to the deal’s up-front value, and clearly both the brand and authorised generic are highly profitable. However, Aralez must hope to do much better than this, especially as it will have to pay Astra double-digit sales royalties.
If it really were to follow the Valeant model a price hike would be on the cards, though there is likely little scope for this with a genericised drug. On a call today Aralez said it assumed the entry of some new generics.
Aralez has employed 110 reps to sell Yosprala, but said it would not be promoting Toprol-XL with its own sales force. The Astra drug seems to rely on large contracts, such as the one struck this year with the US Department of Veterans Affairs.
Given its debt pile, Aralez cannot afford Toprol-XL, Yosprala or Zontivity to fall flat. Moreover, it says the new Deerfield facility is just a bridge to raising even more capital; it looks like neither its debt binge not its appetite for deals will end here.