The “Australian Financial Review”, Australia’s leading economic newspaper, reports that the management of Australian pharmaceutical and medical equipment firm Faulding & Co. (OTCBB: MAYNY, ASX: FHF) has agreed to accept the 2.3 billion Australian dollar bid by the Mayne Nickless group. The offer is A$300 million greater than the previous offer.
The Australian Financial Review also reports that Mayne Nickless guaranteed the sale of Faulding’s US assets. According to Australian Financial Review, the buyer is either Israeli company Teva (Nasdaq: TEVA) or US company Mylan Laboratories (NYSE: MYL). It appears that the probability that Mylan, which replaced its entire senior management last week as part of its reorganization, will make an acquisition of this size is low.
The Australian Financial Review report, unconfirmed by company sources, states that Mayne Nickless has obtained a A$950 million loan, enabling it to increase its offer by adding a A$7-8 cash component. Mayne Nickless, the largest healthcare services group in Australia, has been trying to acquire Faulding for many weeks.
Faulding's management recommended a month ago that company shareholders reject the Mayne Nickless group’s tender offer to purchase, claiming the $1 billion price offered was too low. Faulding, however, quickly returned to the negotiating table.
While negotiating with Faulding, Mayne Nickless also held talks with generic drug companies in recent months in order to sell Purepac, Faulding’s generic drug company, evaluated at $550-600 million. The Australian media reported that Mayne Nickless negotiated with groups such as IUAX of the US and Mylan. In a successful attempt to increase its value, Faulding itself also held talks with generic drug companies.
At the beginning of June, The Australian Financial Review claimed that Faulding management was about to reject Mayne Nickless’s hostile takeover bid, while negotiating with another potential buyer, Israeli group Teva, as well as with IUAX.
However, it seems that from the start, Teva was not interested in the whole package. Faulding’s main business, the supply of medical equipment and provision of medical services, does not really interest Teva. However, Purepac, the sixth largest generic drug compay in the US market, could fit very well with Teva, and with other generic manufacturers which it is believed are interested in the company, among them Mylan (which in the past Teva expressed interest in acquiring), Ivax (AMEX: IVX), Alpharma (NYSE: ALO), and Watson Pharmaceuticals (NYSE: WPI).
A month ago, Teva would not confirm it was conducting negotiations to buy Faulding or its subsidiary Purepac. Teva said at the time that “Teva reports when it has something to report.” We received a similar response today. Nevertheless, the Australian Financial Review says Teva and Mylan have already appointed Australian advisers to promote the negotiations for the acquisition of Purepac.
Purepac’s sales have shown consistent growth in the past few quarters, mainly thanks to the successful launch of Diltiazem, which Teva also sells. The drug is intended for angina pectoris sufferers. In 2000, the company had an operating profit of $25 million from a turnover of $147 million, accounting for two-thirds of Faulding’s profits.
Apart from Diltiazem, Teva and Purepac have other products in common: Etodolac, an infection prevention drug; Nifedipine, a generic version of a drug for treating high bood pressure and angina pectoris; and Clonazepam, an epilepsy drug.
The growth in Purepac’s business is expected to continue. The company currently has some 17 drugs awaiting FDA approval. These drugs have an estimated market of some $7 billion, on the basis of the price of the ethical product. Teva, which has generic drug sales of over $1 billion a year, has 51 generic products in the pipeline, with a market worth some $16 billion, on the basis of the ethical products’ prices.
Just like Teva, Purepac also discovered the ethical drug field in recent years and began to develop products. Purepac’s current basket of products includes ethical drugs such as Kadian, a delayed-release morphine drug, and Serax, a drug for treating anxiety. Sales of these two drugs are still low, however, compared with generic drug sales.
Three months ago, Purepac received a warning from the US Food and Drug Administration, involving deviations from manufacturing standards found in an audit at its plant in Elizabeth, New Jersey. Purepac management says the company dealt with most of the errors, which will have no significant effect on its business. The FDA warning will not help business, however; from now on, the company will be under close FDA scrutiny.
Perhaps Teva will acquire Purepac; perhaps not. One thing, however, is clear – Teva plans to continue its acquisition campaign, which has gained momentum in recent years. While Teva’s business may be yielding organic growth, the process of acquiring companies in the field is responsible for the surge in its business. Teva, which currently controls 13% of the generic market, acquired Canadian company Novopharm for $400 million at the beginning of 2000, only a few months after swallowing up US company Copley.
The price of acquiring Purepac is estimated at $550 million, four times its revenue and far greater than the price Teva paid for Novopharm. The price is quite reasonable, however, in view of the prices of Wall Street-listed generic drug companies.
Teva, whose positive cash flow is growing from quarter to quarter, can easily draw this sum out of its wallet. Furthermore, in October 2000 the company raised $500 million in convertible bonds. At the same time, Teva would probably prefer to use the strong currency of its share price and continue its record of acquisitions by means of share swaps.
Published by Israel's Business Arena on July 10, 2001