The analysts you mention are confirming what seems apparent (you can check NYTimes and WSJ for additional information). Again, we have evidence of a continued drive toward industry consolidation, as 2015 is threatening to surpass the all time record for M&A in the pharma industry. Getting bigger matters less than getting focused on therapeutic areas. However, increased size enables firms to reduce costs synergistically, but also allows for price advantages and geographic reach that improve margins. With the increasing M&A and the position Elite finds itself in, I have spent a little time looking at the buyout that many (including me) expect.
I think the offer will be made within the next 12 months and it may be before or after FDA approval, based on a number of factors, not the least of which is the potential costs associated with the acquisition. Sooner is cheaper for the acquirer and that is just a fact. In looking at the potential acquirers, I looked at some obvious US names – Pfizer, Purdue, J&J - that have some pain meds. While not the only US names, they might be the more obvious ones (surprises are always possible). However, I discounted each quickly (this is my game, so I get to do that). J&J just got rid of a pain med and does not seem interested in that therapeutic area beyond OTC. Pfizer has Embeda, for better or worse, and had a bad partnership with Acura on an ADT approach. Purdue has issues with litigation, and there might be a concern at the onset of antitrust issues because they are the current opioid pain med market leader with near 30%. So, I tend to lean away from those three, as well as other US based firms because, in no small part, the cost of and for Elite’s acquisition might well be better and cheaper for a foreign pharma. Here is why…
The dollar has increased against foreign currencies and on today’s market a pharma firm might pay the equivalent of 12% less in absolute costs due to the exchange rate differences. Now, that is no small amount. If we suggest Elite might be bought at the same price King was bought by Pfizer ($3.5 Billion), 12% is effectively $420 Million less. Not exactly chump change. Further, since the price would be low enough not to necessitate the use of stock, the acquisition could be done with cash; preferably cash obtained by borrowing at a lower interest rate that will not remain low much longer. Since debt is cheaper than equity (given the time value of money, this is why we mortgage homes), using leverage makes sense and makes it a wise manner of paying for the acquisition. Also, there might be tax advantages; but that gets murky and not my area of expertise.
With all the above, there were additional factors to consider, such as: existing therapeutic lines consistent with Elite’s product lines (generics and pain meds); manufacturing, warehousing and distribution networks; existing relationships to enable global sales/marketing; experience with the complexity and integration of acquisitions; and a diminished concern for regulatory threats. As a result, my list of potential acquirers of Elite came down to two firms…Teva and Actavis. An argument can be made to favor either. Both are on the lookout for acquisitions, and are seeking those that might offer an ease of integration (bolt-on) while offering the opportunity to expand or extend existing therapeutic lines.
With such a scenario, the question becomes - What might the actual price be? As time passes, it gets less uncertain (unsurprisingly), but there is always some uncertainty. First, let me say that you must remember the valuation that matters will be done by the potential acquirer. Any valuation that has been done to date or in the future by Elite will merely (but ably) serve as a point for negotiations. But, no firm will acquire another for a price they do not consider fair value. With that, I have little doubt upon filing for their NDA Elite will garner an offer north of $3.5 Billion. I also think (and have consistently thought) their outstanding share count will be about 725 Million or less by the time the final acquisition is completed. Both are (somewhat) educated guesses; as is all the above. I have been wrong before and will be wrong again. But, all this is within the zip code of probability – not possibility. It is not a question of if, but of when and who.
