The last remaining Indian interest in the bidding for drugs giant Merck KGaA’s generics medicines business has fizzled out with the withdrawal of private-equity suitors CVC Capital Partners GmbH and a partnership between Fortress Investment Group LLC and Greater Pacific Capital from the auction.
CVC had partnered with Aurobindo Pharma Ltd, a mid-sized Hyderabad drug maker, on the bid, which is expected to top $6.8 billion (Rs27,880 crore) when the auction of the Merck division ends later this month.
Ahmedabad-based Torrent Pharmaceuticals Ltd was to offer manufacturing and back-end management support to New York’s Fortress Investment and Greater Pacific, an investment firm in London.
A person who was involved in the auction said another suitor in the bid, Mylan Laboratories Inc., had set a final price of around $6 billion last week, but was outbid with a $6.8 billion offer by rival Actavis Group HF of Iceland.
It could not be confirmed if this meant that Mylan was out of the race.
Mylan spokesman Patrick Fitzgerald did not return calls for comment, but a senior executive, speaking on condition of anonymity, said the US company could still be in the running for the Merck division, which had sales of $2.5 billion in 2006. Israel’s Teva Pharmaceuticals Industries Ltd and buyout firms-duo Apax Partners Worldwide LLP and Bain Capital LLC are still in the auction, said the person. It was unclear where their bids stood.
The Merck division, which analysts see as the last remaining big asset in the $50 billion-plus global off-patents business, is sought after for its size and spread. It has a presence in more than 28 countries, mainly in highly-regulated Europe—a market other generics majors, such as Teva, Actavis and Mylan, covet—and which small ambitious Indian players were eyeing.
India’s biggest drug makers Ranbaxy Laboratories Ltd, Cipla Ltd and Dr Reddy’s Laboratories Ltd had expressed interest in the Merck asset, when the German major said in January it may sell its generic business to focus on branded medicines after it took over Serono SA for nearly $14 billion. But all three Indian firms withdrew over what analysts saw as their inability to fund such a large acquisition in relation to benefits from the merger.
Industry insiders had expected Aurobindo and Torrent to gain significantly in new business shipped from Merck’s European facilities to India, if their private-equity partners won in the auction. A Torrent spokesman said, “the company does not comment on such developments, which involve confidentiality.”
Mylan, which acquired the Hyderabad-based Matrix Laboratories Ltd last August for $740 million, too, was expected to shift a significant portion of Merck’s manufacturing to India if it won the bidding. “Matrix, with USFDA-approved facilities and European and Australian approvals for its active pharmaceutical ingredients,” would have fitted into Mylan’s global plans if it bagged the Merck asset, the firm’s executive said.
Teva and Actavis do not have manufacturing capacities of any significant scale in India. Calls to Teva’s press office went unanswered. The plans of Apax Partners, which recently invested in two pharmaceutical firms—Xanodyne and Zeneus—for Merck’s manufacturing facilities, have not been disclosed yet.
“I am not surprised at the development of CVC pulling out,” said Sanjiv D. Kaul, managing director of Chrysalis Investment Advisers. “The initial exuberance gets tempered down as and when reality and business compulsions set in.”
A report on the Merck generics business, prepared by consultant KPMG, projected the division will grow annually at around 13% in its traditional “branded generics” business and over 8% in its respiratory and allergy medications business, taking overall compound revenue growth to more than 12% between 2007 and 2010.
KPMG, in the due diligence report, projected the Merck division’s income from traditional branded generics would rise from around €1.45 billion (Rs8,120 crore) this year to €2.1 billion by 2010, while sales from respiratory and allergy drugs business would rise to €500 million from €400 million. In these four years, the division’s Ebitda (earnings before interest, tax, depreciation and amortization) would nearly double to €450 million in 2010 from €250 million now.
Based on the data made available by the Merck management, KPMG has also indicated that there would be a fall of around 20% in Ebitda in 2007 due to litigation expenses pertaining to patents on its respiratory drug DuoNeb in the US courts.
Merck, in its latest annual report, said it expects a sharp decline in sales of DuoNeb. The drug lost market exclusivity in the US with Sandoz AG obtaining a nod from the food and drugs administration in December 2006 to sell a generic version of the drug. About €269 million, or 15%, of sales at the Merck division comes from DuoNeb. Merck derives 31% of its total generics sales from the US, predominantly from DuoNeb and EpiPen, two super generic respiratory therapies marketed by Dey Inc., a wholly-owned subsidiary of Merck’s generics division.
Some bidders fear Merck will lose patent advantages in two more key drugs in the respiratory and allergy segment with patent challenges by global generic-drug firms. Further, with more European countries following the German government example of tightly controlling drug prices, they expect the Merck generics unit’s Ebitda will be at least a third less than that projected in the KPMG report.