As Endo International plc ties up its takeover of Par Pharmaceutical Holdings Inc. from TPG Capital for $8.05 billion in cash and stock to build strength in generics, speculation bubbles about mergers to come in the sector.
Endo CEO Rajiv De Silva said during a conference call with investors that, "while there's much talk about transactions in this space, as I've consistently said, real value is created not by doing a deal but really integrating well and operating those transactions going forward," bolstering the specialty firm's mix of generic and branded drugs, a strategy that "offsets a single-segment risk for our shareholders."
During its latest earnings call, Dublin-based Endo had dropped hints that the firm might be in buying mode, which prompted guesswork that generics players such as Buffalo Grove, Ill.-based Akorn Inc. and Perrigo Co. plc, also of Dublin, would turn out Endo targets. Now that Chestnut Ridge, N.Y.-based Par has been disclosed as the choice, the likes of Valeant Pharmaceuticals International Inc. – or Perrigo – could make a move on Akorn, in the view of RBC Capital Markets analyst Randall Stanicky, who wrote in an alert to investors that the price paid by Endo was "reasonable."
It was Laval, Quebec-based Valeant that won against Endo in the bidding for Raleigh, N.C.-based Salix Pharmaceuticals Ltd., which was acquired by Laval, Quebec-based Valeant Pharmaceuticals International Inc. Complicating matters further, Mylan NV, of Potters Bar, UK, has made a play for Perrigo, even as Jerusalem-based Teva Pharmaceuticals Co. Ltd. made an unsolicited attempt to gain ownership of Mylan. (See BioWorld Today, March 12, 2015, and April 9, 2015.)
Under the terms of the Endo-Par deal, expected to close in the second half of this year and cleared by the boards of both companies, the purchase price will consist of about 18 million shares of Endo equity ($1.55 billion of value based on the 10-day volume weighted average share price of Endo ending Friday) and $6.5 billion in cash to Par shareholders. Leerink Partners analyst Jason Gerberry found the deal "relatively rich" but said in a research report that "substantial cost synergies get us more comfortable" with Endo's spend. The pact "helps provide scale in an increasingly consolidating generics space."
Endo's stock (NASDAQ:ENDP) closed Monday at $80.77, down $4.58. The company said it has secured fully committed financing from Deutsche Bank and Barclays to cover the cash portion of the arrangement, and expects to put in place a "permanent capital structure" to finance the transaction that would include a combination of cash, debt and an equity offering. In 2012, privately held Par was acquired through a take-private transaction by an affiliate of TPG.
The tie-up of Endo and Par will create a generics heavyweight chalking up sales likely to rank in the top five U.S. generics firms and "provides a significant boost to [Endo's] abbreviated new drug application backlog and development engine, with over 200 in the pipeline and 115 filed with FDA as of year-end," noted Stanicky. "Importantly, Par can bring 20-25 new filings per year going forward."
Endo said the takeover of Par will be accretive to non-GAAP diluted earnings per share within the first 12 months, with double-digit accretion to non-GAAP diluted earnings per share next year. The firm sees operational and tax synergies of $175 million while strategically maintaining research and development efforts, with Par CEO Paul Campanelli joining Endo to lead the generics push.
Earlier this month, Endo disclosed the purchase of a portfolio of branded and generic injectable and established products focused on pain, anti-infectives, cardiovascular and other specialty therapeutics areas from a subsidiary of Aspen Holdings, of Durban, South Africa, which sells branded and generic products in more than 150 countries. Its product lineup generated about $28 million in revenue during the fiscal year that ended June 30, 2014. Endo "is also open to larger, more transformative deals, and [the] focus here is not going to go away," Stanicky wrote in a research report at the time.
PiperJaffray analyst David Amsellem pointed to "a litigious pipeline, but some attractive date-certain launches." Endo conceded that "a sizeable chunk of the Par pipeline consists of paragraph IV/first-to-file opportunities," he wrote in a research report. "Though that on the surface could be a recipe for lumpy revenues, the strong mix of more complex oral solid dosage forms along with more contribution from the injectables portfolio should mitigate concerns regarding significant revenue volatility." He cited a handful of "attractive" launches ahead, such as generics for Zetia (ezetimibe, Merck and Co. Inc.), due in December of next year, and Seroquel (quetiapine, Astrazeneca plc), hitting the market in October 2016.
Endo CEO De Silva said he "see[s] tremendous opportunity for our combined business organically. But I would also say, given our scale, we will also continue to look for other inorganic opportunities to add to this business, as well," adding that the firm will "certainly be open to other acquisitions in injectables, because we do feel the general injectable area in the hospital space would be one of strategic interest for us."
Analyst Stanicky's colleague at RBC, Miles Highsmith, while finding the Par deal "makes a lot of sense," predicted in his research report that Endo "will continue to pursue transactions that benefit shareholders" but "in a disciplined fashion, with limitations on increases to leverage."
Separately, Endo said the FDA approved a label update that bolsters the safety and efficacy of Xiaflex (collagenase clostridium histolyticum) for the treatment of adult Dupuytren's contracture (DC) patients with a palpable cord. The updated label now includes a long-term, observational study demonstrating the rate of recurrence for up to five years after successful treatment with Xiaflex, and the efficacy and safety of retreatment in patients with recurrent DC. Endo gained Xiaflex, first approved more than five years ago, in the $2.6 billion buyout of Chesterbrook, Pa.-based Auxilium Pharmaceuticals Inc., which forsook another suitor, Canadian biotech QLT Inc., in order to make it happen. (See BioWorld Today, Oct. 10, 2014.)