Endo International’s move on TPG-owned Par Pharmaceutical Companies is the type of return private equity strives for – the $8.1bn price tag represents a valuation quadrupling in just three years.
With every fish in the speciality and generics space seeking to gobble up somebody smaller to keep from being swallowed themselves, it is not too surprising that a company about to re-enter the publicly traded markets has been snapped up before an IPO. For Endo this is defence against the likes of Mylan and Teva that is surely driving its moves. The deal will bring its M&A tab to more than $10bn in the past 12 months.
The M&A play combines two companies of similar size and scope, with Endo reporting sales of $2.9bn and Par $1.3bn in 2014. Par is built around the traditional generics model more than Endo, which boasts a portfolio of non-blockbuster but patent-protected assets in the pain and sex hormones spaces in addition to generics and a small medtech presence.
It makes for a logical combination, however, as Endo looks to make use of its Irish domicile to knock down Par’s effective 41% tax rate. Endo's finance chief, Suketu Upadhyay, said the acquisition would raise Endo’s pro forma rates to the “high teens”, but that he saw opportunities to reduce taxes further.
Par had been taken private in 2012 in a $1.9bn all-cash move fronted by the US group TPG. Little is known about how much had been invested in Par since then, but the group was loss-making in 2013 and last year, only swinging back to a net profit in the first quarter of 2015 on the back of growing sales, reduced R&D spend and the ending of an asset impairment.
In February, just before Par filed to re-enter the public markets, it raised more debt to help pay a $494.3m cash dividend to its owners, and a $40.7m special bonus to certain employees.
Regardless of tax rates, Endo sees $175m-worth of operational and tax cost reductions and said the deal would be accretive within 12 months.
Today's deal consists of $6.5bn in cash and $1.5bn in equity to Par's shareholders. Endo will finance the cash component of the payment through its own cash on hand, loans, bonds and an equity offering of $1.5-$2bn.
The move follows Endo’s $2.6bn takeout last year of the speciality player Auxilium Pharmaceuticals, which brought on board a small portfolio of innovative drugs – most significantly the Dupuytren's contracture injection Xiaflex and the erectile dysfunction agent Stendra. Also this year, Endo made a modest payment of $130m to pick up a portfolio of injectable agents from South Africa’s Aspen Holdings, bringing on board a revenue stream that amounted to $28m in 2014.
In an environment in which companies must get big or get bought, Endo has clearly chosen the former route. In a call with analysts today executives described the move as creating a top five generics company when measured by US sales, although it remains behind potential suitors in Teva, Mylan and Actavis.
Endo’s moves also could be seen as window dressing, a way to bulk up to command a greater price tag in an eventual negotiation endgame. Two of the three larger generics companies have got where they are by becoming M&A engines. The third, Teva, has made it clear that its chequebook is open – although an acquisition of Endo’s size still might not be the transformative deal that Teva’s investors clearly want (Teva says let’s deal as it puts 2014 in its rear view, February 6, 2015).
Of course it could be that Endo really wants to match brawn with brawn. With the generics sector looking increasingly picked over, this puts speciality groups even more in play. Can groups like Jazz Pharmaceuticals, Alkermes, United Therapeutics or Akorn continue to fend off buyers? The competition might have just heated up.