Endo’s holistic approach winning investor support
Specialty pharma groups Endo and Valeant could teach big pharma a thing or two about how to add value through M&A activity. Following overwhelming investor support for Valeant’s hostile bid for Cephalon, Endo’s shares gained 8% in early trade today to a record high of $44.25 on news of its $2.9bn acquisition of urology medical device specialist, American Medical Systems (AMS).
Following Endo’s $1.2bn purchase of generics player Qualitest Pharmaceuticals, in the space of just six months the company has made by far its biggest and most surprising move. The AMS deal, which ranks as the sixth largest medtech acquisition by a pharma company, completes a major transformation of Endo since its ill-fated $370m acquisition of Indevus Pharmaceuticals two years ago. Endo’s talk of a more holistic approach to patient care, moving away from a product-centric model, seems to be wooing investors.
The acquisition of Indevus in early 2009, coupled with Endo’s tough regulatory and patent battles at the time, particularly over its franchise of pain products, appears to have been a watershed moment.
Since then the company has been hell-bent on reducing its sensitivity to, and reliance on, the success of a handful of products. Four of the five M&A deals struck since Indevus have been about diversification – three medical device companies in AMS, Health Tronics and the Medical Enterprises Group, and Qualitest (Endo to test the quality of generics market with $1.2bn deal, September 28, 2010).
|Endo Pharmaceuticals M&A history|
|M&A Deal Date||Target Company or Business Unit||Deal Value ($m)||Business Type|
|Apr - 11||American Medical Systems||2,900||Medtech|
|Dec - 10||Qualitest Pharmaceuticals||1,200||Pharmaceutical|
|Nov - 10||Penwest Pharmaceuticals||168||Pharmaceutical|
|Jul - 10||Health Tronics||223||Medtech|
|May - 10||Medical Enterprises Group||-||Medtech|
|Feb - 09||Indevus Pharmaceuticals||637||Pharmaceutical|
|Oct - 06||RxKinetix||115||Pharmaceutical|
|Jul - 02||BML Pharmaceuticals||14||Pharmaceutical|
|Jul - 00||Algos Pharmaceutical||-||Pharmaceutical|
|Total deal value||5,257|
Even the one deal which played more to Endo’s traditional franchise of pain and neurology, its buyout of long-term partner Penwest, was such a steal that investors applauded as well (No brainer for Endo as Penwest activists win the day, August 10, 2010).
On a conference call today, Endo’s chief executive, Dave Holveck, talked a lot about Endo’s shift in strategy, which has deep roots in the belief that recent healthcare reform in the US in particular rewards companies that can provide cost-effective healthcare solutions, covering many aspects of patient care, from drugs to technological interventions.
With regard to its recent moves into the medical device and technology sector, Mr Holveck cites a market, in contrast to traditional pharma, which offers shorter, less expensive product development; better pricing and reimbursement flexibility; and less generic threat.
Endo will pay AMS shareholders $30 per share in cash, a 34% premium to AMS’ closing price on Friday, valuing the company overall at $2.9bn; this includes $312m of AMS’ debt repayments.
With sales last year of $538m, the deal values AMS at around five times sales, offering respectable but not outrageous terms; $30 per share is a record high for AMS.
One thing is for certain though, the AMS deal will take Endo away from the major M&A scene, having raised a significant amount of debt in the last six months alone. At the end of December, Endo held $1bn in debt and although the company also holds $466m in cash, the bulk of the acquisition will be funded by new debt, already committed by Morgan Stanley and BofA Merrill Lynch.
Endo management says that only a modest amount of the company’s current cash will be used to help finance the deal, indicating that overall debt is likely to be around $3.7bn by the time of completion, some time in the third quarter.
As such, only small complimentary deals will be considered for now, the company’s main focus integrating the businesses of AMS and Qualitest, paying off its debt pile and trying to drive organic growth.
Despite Endo’s likely move into the M&A shadows for a while, the table below shows the company has made quite a splash in the medtech world. Given rapturous shareholder approval, it is a strategy that could find new followers amongst its traditional pharma peers.
|Pharma companies acquiring medical device and technology companies - Top 10 M&A deals|
|Rank||Acquiring Company||M&A Deal Type||Target Company or Business Unit||Deal Date||Deal Value ($bn)|
|1||GE Healthcare||Business Unit||Abbott’s primary in vitro & point-of-care diagnostics businesses||2007||8.1|
|2||Merck KGaA||Company Acquisition||Millipore||2010||7.0|
|3||Johnson & Johnson||Company Acquisition||DePuy||1998||3.5|
|4||Covidien||Company Acquisition||Surgical Corporation||1998||3.3|
|5||Roche||Company Acquisition||Ventana Medical Systems||2008||3.1|
|6||Endo Pharmaceuticals||Company Acquisition||American Medical Systems||2011||2.9|
|7||Abbott Laboratories||Company Acquisition||Advanced Medical Optics||2009||2.8|
|9||Covidien||Company Acquisition||Sherwood - Davis & Geck||1997||1.8|
|10||Covidien||Company Acquisition||Kendall International||1994||1.4|
All data sourced to EvaluatePharma.