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    Aurobindo, Intas in race for $1 billion buyout of Teva UK, submit binding offers

    Synopsis

    If successful, this would be Aurobindo's largest ever acquisition, surpassing its $132.5 mn purchase of US vitamin maker Natrol Inc in 2014.

    ET Bureau
    MUMBAI: Home grown drug makers Aurobindo and Intas are among the final contenders for the UK and Irish portfolio of Israeli generics behemoth Teva, put up for sale to comply with European anti-trust regulations.

    Both players have submitted binding offers of around $1 billion on Friday along with firm financing commitments, said multiple sources aware.

    Teva is selling assets as part of a broader divestiture process to comply with the anti-trust regulations for its $40.5 billion acquisition of Allergan Plc’s generics business that was announced last year. In an array of piecemeal deals in June, Teva sold around 80 products in the US to drug makers like Dr. Reddy’s, Sagent, Cipla, Zydus Cadila, Aurobindo, Impax and Perrigo. The biggest sale by Teva as part of that process was to Mayne of Australia for $652 million.

    For the UK business, the Indian players are competing with private equity interests from Cinven, a London-headquartered private equity firm and buyout specialists Apollo Global Management LLC. An earlier Bloomberg report said globalpharma giants Mylan NV and Novartis AG are also potential suitors but it could not be independently verified if they have indeed put in firm bids last week.

    A buyer could emerge in the next few weeks, the people quoted above said. The European Commission may prefer the assets going to a strategic buyer with experience in the European generics market, added a source directly involved. He however cautioned that there is still no guarantee that the Indian suitors will be successful in the end.

    Mails sent to Aurobindo, Intas and Teva went unanswered until press time.

    If successful, this would be Aurobindo's largest ever acquisition, surpassing its $132.5 million purchase of US vitamin maker Natrol Inc. in 2014. Morgan Stanley is advising the company while Temasek-backed Intas is being represented by Moelis. These are the only two Indian company in fray. Torrent Pharma, which was named in the initial bidding process, has bowed out of the race, informed sources said.

    Greenhill & Co. is Teva's advisor in the sell off.

    Image article boday



    Eye on Europe
    Teva's UK portfolio will help consolidate Aurobindo's position in Europe. Two years ago, the company had set foot in Europe with the acquisition of operations of erstwhile Actavis in a few countries. While the business was making losses at the time of the deal, it is being steadily turned around by Aurobindo through a mix of cost-efficiency measures and careful identification of products that can fetch high margins.

    Within Europe, Aurbindo focuses on markets like France, Germany, Netherlands, the UK, Portugal and Italy. Its revenues from Europe stood at Rs 3,130 crore for the last financial year. The company has approximately 200 products under development for EU alone and expects the region to drive growth over the next 3-4 years even though it is currently still driving profitability improvement.

    "Acquisition-led growth is preferred in Europe as building through new filings is likely to take a considerable time. Also, the healthcare and insurance systems there have slight variations bringing uncertainties in of reimbursed products by insurance companies," said an executive in a consulting firm. He added very few opportunities exist to compare with Teva’s offer for UK and Ireland. "The business had sales of around $250 to $300 million last year," the person noted.

    With sales doubling from Rs 5,855 crore in 2012-13 to Rs 13,896 crore in FY16, a CAGR of 33 per cent, Aurobindo, the 4th largest Indian generic pharmaceutical company, is being watched closely. Last week it was under the spotlight after big bull Rakesh Jhunjhunwala over an investor call quizzed the company management on the future prospects.

    Responding to a specific question from Jhunjhunwala about any fund raising plans, N Govindarajan, Managing Director said fund raising plans, if any, may be more for strategic purposes than for capex. He however underlined the company is in no hurry to raise funds.

    "While US business momentum (45 per cent of total revenues) will continue and remain the primary driver for growth, consolidation of acquired EU business will show a dip in margin on consolidation. ARBP acquisition of Actavis’ WE business (loss-making) has increased business risk and execution related challenges for them," said Deepak Malik and Rahul Solanki, pharma analysts at Edelweiss in an August 24th report.

    For Intas Pharmaceuticals, which is one of the few privately-run pharmaceutical companies getting closer to a size of one billion dollar in sales, Europe is a key market. Intas has marketing, out-licensing and contract manufacturing arrangements for scores of products shipped to Europe. It has built direct marketing in six major western European countries namely UK, Netherlands, Germany, Spain, France and Italy.

    Last year, the Ahmedabad-based drug maker won a key approval from the EU for filgrastim, a biosimilar injection, that helps bone marrow produce white blood cells in cancer patients undergoing chemotherapy. The company figures among the leading biosimilar players gaining as many as six approvals in India.

    Sources noted that the company may be the "dark horse" for the Teva assets, which it is bidding with the backing of a large private equity firm. However, another person was sceptical if the company had enough balance sheet strength for what appears to be an audacious bid.

    The interest of Intas notwithstanding, unlike the US market, Europe presents its own set of challenges. Notably, as part of a switch in business strategy, Cipla’s senior management recently informed investors that the company is switching from the previous "direct to market strategy" in Europe to a "business to business model," indicating presence of several established players in that market who present tough on-ground competition.

    A top industry source also cautioned that although the Teva UK/Ireland deal is moving along expected timelines, it may still face a small regulatory hiccup. An ongoing investigation by UK’s Competition and Markets Authority related to price increases in a few drugs have led a few prospective bidders to rethink the implications, according to the source.

    Last year, the authority had found a few drug companies sharply increased the prices for the drugs supplied to the National Health Services, which is a publicly funded healthcare system. While it could not be ascertained if Allergan's (Teva's) deal will be impacted as a result of the probe, the executive expressed concerns over a negative fallout in the future. Although he maintained the reps and warranties should cover any future liabilities.

    Earlier in March, Teva won conditional European Union approval for the Allergan unit takeover after dispelling regulatory concerns with concessions, including the sale of "the great majority" of the subsidiary’s UK and Irish business.

    Teva has also already agreed to sell some other assets in order to get global antitrust approval. In June, it pledged to divest a basket of generic drugs to Australia’s Mayne Pharma Group Ltd. for $652 million. Earlier that month, Impax Laboratories Inc. and Dr. Reddy’s Laboratories Ltd. both announced deals to buy some other generic products from the two companies.


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