Recordati deal points the way to a new private equity sweet spot

The Italian speciality pharma group Recordati has been on the auction block for a couple of years, and in the end it had to take a cut-price offer from a private equity firm, CVC, to get a deal done.

A look at the company’s uninspiring roll call of top products helps explain why others were not clamouring to pick up the family-controlled business, despite its earlier efforts to reinvent itself (see tables below). Still, deals are always possible at the right price and, with innovative companies looking too expensive for private equity, smaller speciality players could represent a new sweet spot for these potential acquirers.

This assumes that private equity groups are still confident that they can wring a profit out of speciality companies already under fire for raising the prices of established products.

CVC evidently believes that it can make money from Recordati, and picked the asset up at a discount. The €3.03bn ($3.5bn) that CVC has shelled out for a 51.8% stake was done at €28.00 per share – below its trading price of €34 on Friday before the deal was announced.

As a sign of the market's disappointment Recordati traded off 14% today. The publicly traded portion of the group is expected to remain listed on the Italian stock exchange, and Andrea Recordati will remain chief executive officer.

Quantity, not quality

If CVC has managed to drive a hard bargain it still has work ahead to get the best out of Recordati: the Italian company has seemingly gone for quantity over quality with a long list of products  with most pulling in less than $100m per year. 

And sales of its lead asset, Zanidip, which came off patent in 2010, are set to shrink further in the next few years.

Meanwhile, Recordati’s pipeline looks distinctly sparse, and the projects it does have in development are not without their problems: Erytech last week withdrew a European filing for Graspa in acute lymphoblastic leukaemia, saying it would now focus on solid tumours including pancreatic cancer. Graspa flunked a phase IIb trial in acute myeloid leukaemia in December.

Recordati could do with an overhaul. Whether a 51.8% stake will give CVC the power to carry out such a reboot is another question.

The group could take less drastic measures to improve Recordati’s performance, such as upping the prices of its products or employing the age-old private equity tactic of cost-cutting. However, the former would probably not go down well in the current cost-conscious climate, and Recordati’s operating margin of 32% suggests that it is already a fairly lean enterprise.

CVC hinted that deals were on the table, saying it plans to expand Recordati’s core business and rare disease offering.

Still, this strategy has not worked for the Italian company in the past: in the mid-2000s Recordati went on a deal-making push in a bid to become more innovative. However, this ultimately came to naught, presumably because the family-run company lacked the funds to make transformative acquisitions.

Recordati has licensed or bought in various products in the past few years, such as the acquisition of Bayer’s laxatives Transipeg, TransipegLib and Colopeg last December, but these have failed to excite.

More to come?

With Recordati now – mostly – in the hands of private equity, could other speciality players be next?

There has been a recent spate of private equity buyouts in medtech, mostly involving large conglomerates selling off business units, while the likes of Valeant and Perrigo have also offloaded some franchises to venture capital groups.

These big speciality companies, despite their recent tribulations, are probably still too pricey for the money men. Smaller UK players such as Sinclair Pharma and Alliance Pharma look more digestible – but Andy Smith, an analyst from Edison Investment Research, believes that valuations have probably not come down enough just yet.

“I’m not sure the market has fallen out of favour enough with small cap operational speciality pharma to undervalue them enough for private equity to find them attractive,” he told EP Vantage.

With the speciality pharma model still under pressure, however, these assets could become more enticing in the not-too-distant future.

To contact the writer of this story email Madeleine Armstrong in London at madeleinea@epvantage.com or follow  @ByMadeleineA on Twitter