Biotech Values

[DewDiligence]

The WSJ chimes in on the MYL-Merck KG deal.
Nothing revealed here dissuades me from thinking
that this deal was largely about Empire Building.

http://online.wsj.com/article/SB117909191327801308.html

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Mylan Is Now Big Generics Player
After Deal for Unit of Merck KGaA

U.S. Drug Maker to Pay $6.6 Billion for ‘Beachfront Property’

By ANDREW DOWELL, GANGOLF SCHRIMPF and DENNIS K. BERMAN
May 14, 2007

Mylan Laboratories Inc.'s agreement to pay €4.9 billion ($6.6 billion) for the generic-drugs unit of Germany's Merck KGaA will create a leading global competitor, with combined revenue of $4.2 billion in 2006 and about 10,000 employees.

The price Mylan is paying for the Merck division is near the top of the range of €4 billion to €5 billion that analysts had expected the unit to fetch. To pay down debt taken on to fund the deal, Mylan, based in Canonsburg, Pa., said it will issue $1.5 billion to $2 billion in equity or equity-linked securities and suspend its dividend.

Tight profit margins in the generics business have forced a wave of consolidation as companies attempt to cut costs and improve profits. Most drug companies say it is too difficult to deal in both the generics and branded-drug sectors, although Novartis AG does [a business model that is entirely sensible, IMHO].

Competition among generic-drug makers requires constant price-cutting and attempts to overturn drug patents to sell generic versions of branded drugs. Inventing new, branded medications requires more investment in research and development, longer timelines and defense of patents. Merck Generics was the world's No. 3 generics business by revenue in 2006, said Mylan and Merck KGaA, which isn't affiliated with Merck & Co. of the U.S. The generics division in 2006 had an operating profit of €307 million, up 29% from a year earlier, on sales of €1.8 billion.

Mylan has been trying to find its way since the company's bid to acquire specialty drug maker King Pharmaceuticals Inc. failed in 2005. The company's stock swung wildly when financier Carl Icahn snapped up Mylan shares and moved to block the King deal. Afterward, Mylan focused on its basic business of legal challenges to win exclusive rights to sell generic blockbusters and worked to improve its drug-manufacturing capacity. In April, it boosted its earnings forecast for the fiscal year ended March 31 because of stronger-than-expected sales.

Among the losing bidders was Israel's Teva Pharmaceutical Industries Ltd., which said the unit would have been a strategic fit but in the end a transaction didn't meet its "stringent financial criteria." [This is a euphemism for saying that TEVA thought MYL overpaid.] According to people familiar with the matter, other companies that were interested in the business at various points had included India's Torrent Pharmaceuticals Ltd., Ranbaxy Laboratories Ltd., Actavis Group HF of Iceland and a private-equity group comprising Bain Capital and Apax Partners.

A spokeswoman for Merck said proceeds will be used to reduce debt -- which rose sharply when Merck took control of Swiss biotechnology company Serono SA for €10.6 billion at the start of this year -- but that shareholders can also expect a dividend from the transaction. The company had said in January that it was evaluating strategic options for the generic-drugs division to focus on its core operations.

Merck KGaA Chief Executive Karl-Ludwig Kley said on a conference call that Merck was aiming for both organic growth and growth through acquisition. He said the company was trying to build headroom for more purchases, but nothing concrete was on the agenda.

The deal will hurt Mylan Laboratories' cash earnings per share in the first year and be neutral in the second year, the company said. It expects cost savings of $250 million by the end of the third year after the deal closes, expected in the second half of 2007. It doesn't plan to cut many jobs.

Members of the Merck unit's senior management, including Chief Executive Hank Klakurka, will make the move to Mylan Laboratories, the companies said.

Mylan Chief Executive Robert Coury said that the auction between his company and Teva "went down to the last, last minute. It was a dog fight." He said that the deal was one that the company had to do, given how rarely such businesses come on the market. [Note the use of the word “had” in this context, which is a symptom of Empire Building.]

"It's like any other beachfront property. If you want it, something that unique, you're going to pay for it. Don't believe an asset like this will come up in a long, long, long time," he said.

He was also confident that the deal would give Mylan a leg up on the production of generic biologics, which have yet to come to the market in the U.S. because of safety and regulatory concerns. Biotechnology companies are also lobbying against such efforts. But if and when they do come, Mr. Coury said, "We will have much more lead time ahead of our competitors. That itself will pay for the transaction." [This is typical Coury-style bluster, IMO. Even after this acquisition, MYL is not as well placed in generic biologics as NVS, TEVA, BRL, MNTA, and GTCB.]
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