Leo and Warner strike mutually beneficial deal

Leo Pharma yesterday took a massive step towards acheiving its ambition of breaking into the US market by reacquiring the rights to its psoriasis treatments Taclonex, Taclonex Scalp and Dovonex from Warner Chilcott for $1bn, in a deal that should help both companies achieve important goals.

The acquisition, which also gives Leo its pipeline drugs back, looks to be a divorce of convenience on the part of Warner, anxious to secure the funding it needs to complete the $3.1bn acquisition of Procter & Gamble’s pharmaceutical assets by a December 31 deadline (Warner Chilcott piles the debt back on with $3.1bn P&G move, August 24, 2009).

Cash injection

When Warner first announced the P&G deal, the price tag was much higher than many had expected and the company had to secure just over $4bn in financing from a total of six banks. Given the size of its newly acquired debt it is not surprising that Warner took the decision to return the drugs to Leo and get much needed money.

Finding a way to finance at least a portion of the P&G deal also means that Warner will retain its reputation for being able to pay down debt quickly. The sale to Leo will add about $980m to the coffers, and many believe the cash could be used to pay down the more expensive senior secured credit facility, of which $480m was outstanding on September 23.

While the deal gets Warner out of debt faster, for Leo it looks reasonably priced. Last year, sales of Taclonex, Taclonex Scalp and Dovonex were $277m, meaning that the deal works out at about 3.6 times sales if the pipeline is ignored completely, this just about compares more favourably to the three times sales that GlaxoSmithKline paid for Stiefel Laboratories earlier this year (Glaxo buys Stiefel for $3.6bn as diversification strategy continues, April 20, 2009).

However, sales of Dovonex are expected to decline from 2012 onwards, meaning that if the pipeline does not deliver the deal could start to look more expensive.

The American dream

For Leo, the deal importantly opens the door on its move into the world’s largest market. The group announced yesterday that it would be setting up a New Jersey base and expects to begin trading at the beginning of 2010.

This marks the second acquisition for Leo this month and its biggest to date. On September 2 the group announced that it would be buying the dermatology assets of Australian company Peplin for $287.5m.

As Leo is a private company, and one run as a not-for-profit arm of Denmark’s Leo Foundation, the group is under no obligation to give out detailed financial statements and it is hard to gauge whether the Warner acquisition coming on top of the Peplin deal is a stretch for the company.

From the little information the group reveals last year it had 1.13bn in sales and $498m in net income. But what should be remembered is that Leo has some of the highest margins in the industry, which last year ran at 44.3%, meaning it should be highly cash generative (Smaller companies win in most valuable race, June 18, 2009). As such if conquering the US is the group’s ultimate goal, then more acquisitions should not come as a surprise.

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