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Dainippon Sumitomo Will Pay $2.6 Billion for Sepracor in U.S.

http://www.bloomberg.com/apps/news?pid=20601080&sid=aTgPotH2CNhw&refer=asia

By Kanoko Matsuyama and Tom Randall

Sept. 3 (Bloomberg) Dainippon Sumitomo Pharma Co. agreed to buy Sepracor Inc. for $2.6 billion to gain a U.S. sales force and experimental treatments in the world’s biggest drug market.
Dainippon will pay $23 a share, 28 percent more than Sepracor’s $18.03 closing price on Sept. 1, the companies said today. Marlborough, Massachusetts-based Sepracor will become a wholly owned unit of Dainippon after the all-cash transaction is completed, they said.

Japanese pharmaceutical companies have spent more than $12 billion since 2008 buying U.S. rivals, taking advantage of the yen’s 26 percent gain against the dollar in the past two years to expand in the $291 billion U.S. prescription-drug market. Osaka-based Dainippon, a unit of Japan’s second-biggest chemical company, plans to submit its experimental schizophrenia treatment Lurasidone for U.S. regulatory approval in 2010 and start sales in 2011.

“The takeover enables Dainippon Sumitomo to sell its schizophrenia drug, which will have mid-to-long-term profit potential,” said Hiroyasu Ito, a Tokyo-based fund manager at Dai-Ichi Mutual Life Insurance Co., which holds $296 billion of assets including the Japanese drugmaker’s shares.

The company will fund the acquisition through a 200 billion-yen ($2.2 billion) bridge loan and its cash reserves of 50 billion yen, Dainippon said. Company President Masayo Tada declined at a briefing to identify the lenders.

Debt Rating

The drugmaker had 900 million yen in long-term debt as of June 30, according to its financial statement. Mikuni & Co. rates Dainippon’s debt A, the Tokyo-based risk assessor’s third- highest of nine levels.

“We don’t change ratings based on announcements of events such as mergers and acquisitions,” said Mariko Kodama, a manager at Mikuni’s credit rating department. “After such events, we will assess the company’s capital-to-assets ratio and its ability to manage its operational structure.”

Companies have announced $983.4 billion of mergers and acquisitions globally this year, down 46 percent from the same period in 2008, according to data compiled by Bloomberg.
The value of deals fell to $85.8 billion in August from $127 billion in July and $128 billion a year earlier.

“The yen is very strong, and Japanese companies have been very active in this space,” Les Funtleyder, an analyst with Miller Tabak & Co. in New York, said by telephone. “It’s been pretty widely known that Sepracor has been shopping itself for a while. It’s a cheap company, on a valuation basis.”

Sepracor Shares Surge

Sepracor jumped 26 percent, the most in more than five years, to $22.80 on the Nasdaq Stock Market yesterday before trading was halted. The Nikkei English News reported earlier that Dainippon would offer about 250 billion yen ($2.7 billion) to take over the company.

Lurasidone will be the first drug sold in the U.S. by the company, which is also developing treatments for diabetes, hypertension, bronchial asthma and allergic rhinitis.

“The future of Lurasidone will decide whether the takeover price was good value for Dainippon Sumitomo,” Kenji Masuzoe, an analyst at Deusche Bank AG in Tokyo, said by telephone. Major schizophrenia drugs such as AstraZeneca Plc’s Seroquel will lose patent protection around 2012, putting Lurasidone in a “difficult position” as it faces generic competition, he said.

Sepracor has a sales force of 1,200 in the U.S. and is researching drugs including treatments for asthma, allergic rhinitis and insomnia, according to a statement announcing the takeover. The company’s experimental epilepsy drug, Stedesa, awaits a U.S. decision due by Jan. 30, 2010, while sales of its biggest product, Lunesta, declined in 2008.

‘Good Match’

“This is a good match,” Yasuhiro Nakazawa, an analyst at Mitsubishi UFJ Securities Co. in Tokyo, said by telephone. “Sepracor is strong in the areas of sleep disorders and respiratory ailments, which are Dainippon Sumitomo’s focus.”

Nomura Securities Co. and Thomas Weisel Partners LLC advised Dainippon on the acquisition, while J.P. Morgan Securities Inc. and Jefferies & Co. Inc. advised Sepracor.

Takeda Pharmaceutical Co. last year acquired Millennium Pharmaceuticals for $8.9 billion and Eisai Co. bought MGI Pharma Inc. for $3.9 billion. Drugmakers in Japan are looking for overseas expansion opportunities to cope with government- mandated price cuts in the domestic market.

“Our business won’t grow within Japan as the government continues to reduce health-care costs,” Tada said. “It was crucial for us to expand to the U.S.”

Falling Earnings

Dainippon Sumitomo’s net income dropped 22 percent to 20 billion yen in the year ended March 31. More than 90 percent of its 264 billion yen in full-year sales came from Japan. The company said the Sepracor acquisition will add to earnings per share in the year starting April 2011.

Sepracor’s net income jumped more than eightfold to $515 million last year, while sales rose 5.5 percent to $1.3 billion.

Prescription sales in the U.S. rose 1.3 percent to $291 billion last year, according to Norwalk, Connecticut-based research firm IMS Health Inc. in March.

“This is quite an aggressive strategy,” Fumiyoshi Sakai, an analyst at Credit Suisse Group AG in Tokyo, said by telephone. “The biggest challenge will be whether Dainippon Sumitomo is able to make new medicines that sell well in the U.S. after Lurasidone.”

Dainippon gained 1.2 percent to close at 1,025 yen on the Tokyo Stock Exchange, after rising as much as 8.1 percent, while the benchmark Nikkei 225 Stock Average declined 0.6 percent. The stock has surged 23 percent this year, after adding 1.7 percent in 2008.

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