Meda testing if bigger is better

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If your goal is doubling turnover from a base of SKr10bn ($1.65bn) to SKr20bn in the space of five years, then one sure fire way to achieve such lofty ambitions is acquisition. Meda, the Swedish specialty pharma group and serial acquirer, today announced it was getting out the cheque book for its latest deal that will see it get most of the European assets of ailing Valeant Pharmaceuticals for $392m.

Not only does the deal help Valeant, which is busily disposing of its non-core operations, Meda will get an important and strategic entry point into Russia, a market that some estimate is worth roughly $6bn a year, and one that others in the sector are keen to get a foothold in.

The deal marks the 11th major acquisition for Meda since 2003. It has been the sheer amount of deals, which has seen the company snap up US group MedPointe for $790m and the European businesses of 3M Pharmaceuticals for $840m, that has been behind the transformation of Meda from a small Swedish pharmaceutical distribution company to international specialty pharma group.

Massive growth

This has most visibly been demonstrated by the sales growth at the group over the last five years, which has moved from $108m to a forecast $1.73bn for 2008. Impressively, the management team have also pulled off the equally difficult feats of not only successfully integrating the companies acquired, but also raising underlying operating margins, which were a paltry 5% in 2003 to the current levels of 32%.

The group is hoping to pull off the same feat with the margins at the Valeant units, which are currently running at about 14%.

But while others have applauded Meda’s strategy, which has largely gone unnoticed by the majority of the market, some have started to worry about the lack of emphasis on organic growth at the group and the risk of dilution to the shares if the group has to finance future acquisitions with more of its stock.

Today, some of those fears looked to be realistic as Meda announced that it would be raising SKr1.5bn in a share issue.

US crucial

One of the biggest concerns about the group’s ability to hit its sales goals is the potential pressure on its US business, which primarily consists of the assets it acquired when it bought MedPointe in August 2007. That deal gave it access to allergy drug Astelin and allowed it to extend its reach in the country by in-licensing BEMA Fentanyl, a treatment for breakthrough cancer pain.

Astelin, which is Meda’s largest drug representing 14-15% of sales, last year settled a patent dispute with Apotex, that would see the Canadian generics group hold off launching a copycat version until March at the very earliest. It was hoped that this deal would enable the group to switch patients to Astelin-S, an improved version of the nasal spray treatment for hay fever. However, the reformulation drug was last month knocked back by the FDA, causing a potential delay of up to six to nine months and a shorter period to start the vital movement of patients onto the newer product.

When it does get approval, Astelin-S will also be facing the raft of generic anti-histamines that have already hit the market, including Zyrtec.

Other doubts about the group’s sales target ambitions have been sparked by what some see as the changing attitude of the FDA to opioid based products, over concerns about the potential for abuse. BEMA Fentanyl, which is up for review by the regulator on August 31, is forecast to have sales of $192m by 2014. If it becomes subject to complex risk management plans, like other opioids, this might not only create a barrier to doctors' willingness to prescribe the drug, but also prevent off-label use, a factor that often raises the sales of pain medications.

If these fears about the US business, which includes the company’s current best-selling drug Astelin and its biggest future growth driver over the next seven years, BEMA Fentanyl, are born out, then Meda may have to do even more acquisitions to meet its sales growth target, deals that both it and the market may be uncomfortable with.

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