No end to speciality pharma acquisitions on Horizon

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Horizon Pharma’s $3bn hostile offer for Depomed shows, if nothing else, that despite the threat of a Greek exit from the EU and Chinese stock market collapse, in the speciality pharma world it remains business as usual as far as acquisitions are concerned.

Just two months after completing a debt-funded $940m acquisition of Hyperion Therapeutics, the US-based, Ireland-domiciled Horizon is now seeking to buy another company. Depomed has itself only just completed what it considered to be a transformative acquisition: that of US rights to Johnson & Johnson’s Nucynta franchise for $1.05bn.

These deals form part of a long list of M&A transactions in the US speciality pharma/generics space, fuelled by the availability of cheap debt as well as the use of clever financial engineering to make huge tax savings. This year alone has seen Endo’s $8bn move to buy Par, Valeant’s $11.4bn purchase of Salix, and the largest of them all – Actavis’s acquisition of Allergan, valued at $70.5bn.

Disappointing management

And in what has now become textbook procedure for hostile M&A, Horizon has gone public with a proposal, citing disappointment with Depomed's management and board for a refusal to engage in meaningful discussions despite repeated attempts since March. If previous transactions are anything to go by, there will now be brief public relations battle while bankers for Depomed try to flush out an alternative offer, before victory can be declared.

There is of course a degree of uncertainty as to whether a rival offer will emerge – Endo, for example, briefly trumped Valeant’s first bid for Salix earlier this year. However, whether or not this emerges, it can be safely assumed that Depomed’s fate as an independent public company is now sealed.    

Horizon’s offer is a fixed consideration of $29.25 a share, a 42% premium to yesterday’s closing price, payable in its own stock, which it of course claims “full and fair”. This is standard language and tends to mean that the offer, while reasonable, but might still be sweetened slightly. However, given the all-stock nature of the approach, it will be important for Horizon to have its own share price hold up and at the same time attract Depomed’s shareholders. The shares were trading off by around 5% by mid-morning. 

Given the availability of cheap debt as one of the factors driving speciality pharma M&A, the all-stock nature of the proposal looks surprising. Analysts seem to interpret this as suggesting that Horizon was keeping back its cash – or rather its borrowing capacity – to fund further acquisitions.

Horizon did indeed indicate that it was looking at a number of smaller acquisitions (Horizon shows debt and taxes remain the twin certainties in spec pharma world, March 31, 2015).

Winning shareholders

Horizon's main effort to win over shareholders is the claim that the Depomed transaction would generate “significant revenue and operating synergies” and tax savings, and be immediately EPS-accretive. The company, probably wisely, declined to specify its projected operational synergies or tax savings on an analyst call after the deal was announced.

Horizon did, however, disclose that its proposal would result in pro forma combined 2015 net sales in excess of $950m, although this was derived from its own guidance for 2015 sales of $590-610m, and Depomed’s of $310-335m. 

Horizon's opening move at this point is aimed at causing Depomed shareholders to pressure their company to accept its fate and negotiate for a better deal, one based on it being allowed to conduct full due diligence. 

To contact the writer of this story email Robin Davison in London at news@epvantage.com or follow @RobinDavison2 on Twitter

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