Pharma action hots up: UCB acquires Schwarz for $5.6bn

Industry:    April, 2016

Pharma action hots up: UCB acquires Schwarz for $5.6bn

UCB, the Belgian maker of the allergy drug Zyrtec, agreed to buy Schwarz Pharma for E4.4bn ($5.6bn) in cash and stock to gain new medicines for Parkinson’s disease, epilepsy and bladder control.

Shareholders of Schwarz will get E91.1 a share, 20% more than the closing price September 22, Brussels-based UCB said on Monday. The Schwarz-Schuette family, which owns 60% of the Monheim, Germany-based company, backed the offer.

Schwarz is the third European family-owned drugmaker to sell in less than a week as the cost of developing new products swells, older medicines face generic competition and governments slash health-care spending. Schwarz was created by CEO Patrick Schwarz-Schuette’s father Rolf in 1946, when he returned from the war.

“We’re going to see more consolidation, small players will try to get together to gain critical mass and the potential to cut costs,” said Stephen Pope, the head of equity research at Cantor Fitzgerald in London. “Only players with deep pockets are going to survive.”

UCB, which faces patent expirations on its top sellers starting next year, will get three drugs that may garner more than E2bn in annual revenue. Schwarz, the first company to introduce a generic version of AstraZeneca’s ulcer drug Prilosec, is shifting from selling copycat medicines to developing its own products.

UCB was founded in 1928 as Union Chimique Belge to make industrial chemicals. At the time it had only a small pharmaceutical arm, which was expanded in the early 1950s when the company set up a research center and developed the tranquilizer Atarax. The company also made the memory booster Nootropil in the 1970s, alongside chemicals and films.

“They’re paying a high price,” said Patrick Casselman, who holds UCB shares among the E500m in equities he manages at KBC Asset Management in Brussels. “The deal makes sense from a strategic point of view,” he said, but “Schwarz is not yet profitable, there is a risk.”

UCB is offering 20% more than the previous day’s close, the same another German drugmaker, Merck KGaA, offered shareholders of Europe’s largest biotechnology company Serono last week.

Serono earned $189m in the latest quarter, while Schwarz hasn’t had a profit since ’03, when it made almost $1bn in revenue from selling a generic copy of Prilosec. The company has used income from that product to fund development of its own drugs.

UCB has focused on drugs under Chief Executive Officer Roch Doliveux, with the purchase of UK biotechnology company Celltech Group in ’04 and the sale of the chemicals unit last year.

Rolf and his own father Anton started making pharmaceuticals in a rented ballroom above the local inn in Reichelsheim, south of Frankfurt. In 1950, Rolf decided to move the growing company to Monheim on the Rhine, the region where the family came from. Over the past three years, the company has started developing its own drugs.

The bet has provided Schwarz with medicines analysts say may triple annual revenue over the next five to 10 years. Schwarz’s shares gained 41% this year — excluding today’s gain — amid speculation it could become a target as consolidation sweeps the German market.

“A few competitors must be sad today,” UCB’s Doliveux said on a conference call. Pfizer, which bought rights to Schwarz’s experimental bladder-control drug in April, was among those interested in the company, dpa-AFX newswire reported yesterday. A spokesman for Pfizer in Vienna, Oliver Stohlmann, said he couldn’t comment until he consults his colleagues in New York later in the day.

“Competition is more fierce than ever in this environment of health-care reform and rising generics, especially for small and mid-sized companies,” said Florent Cespedes, an analyst at Natexis Bleichroeder in Paris. “The rationale is not bad in the long term. Better to be proactive than wait for an offer.”

UCB needs new growth avenues because it will lose US patent protection on Zyrtec next year. Keppra, the epilepsy drug that became the Belgian company’s biggest seller last year, starts losing patent protection in ’08. Schwarz is close to seeking regulatory approval for a new epilepsy medicine.

“It was very difficult for Schwarz on their own to unlock their great potential,” said Doliveux. “Patrick Schwarz- Schuette and I know each other for a long time. Discussions have intensified over the last six months. This is not something that has happened over the past few weeks.”

The companies expect the transaction to save more than E300m in annual costs within three years. The enlarged UCB will have sales of more than E3.3bn and a research and development budget of E770m a year.

The biggest shareholders after the Schwarz family, Schroder Investment Management and Capital Research and Management, have agreed to tender their stock, Doliveux said. Together, they own around 8% of the company. Drugmakers have announced $96bn in acquisitions this year, compared with $150m last year, according to data complied by Bloomberg.

Last week, family holders of Serono, Europe’s largest biotechnology company, agreed to sell their stake to Merck, controlled by the descendants of founder Friedrich Jacob Merck, in a deal valued at E10.6bn. Altana, controlled by the billionaire Quandt family, also agreed last week to sell its drug unit to Danish pharmaceuticals company Nycomed Holding for E4.5bn.

Bayer, based in neighboring Leverkusen, bought Berlin-based Schering for E17bn in June. “The whole pharmaceutical industry is characterized by intense pressure of cost to develop new products, said Pope of Cantor Fitzgerald. “The costs really do hasten the need for the industry to go through rapid consolidation.”

Schwarz won permission to sell its Neupro skin patch for Parkinson’s disease in Europe last February, allowing UCB to benefit from one new product that’s just reaching the market. Schwarz-Schuette estimates the drug may generate up to E350m a year in sales. That may rise by E300m if Neupro also shows it can fight restless leg syndrome.

In April, the company sold rights to the experimental bladder-control drug fesoterodine to Pfizer for as much as $210m before royalties.

Pfizer, the world’s biggest drugmaker, is paying Schwarz to eliminate a potential competitive threat to its Detrol, the most-prescribed medicine in the world to treat an over-active bladder, according to the New York-based company’s ’05 annual report. Pfizer agreed to pay the German company a share of sales from the medicine as well as royalties on Detrol sales.

Schwarz is close to asking regulators to approve the third, and potentially biggest, of its new therapies, the epilepsy drug lacosamide. The company had sought a partner to help market the product, which may also help treat pain associated with advanced diabetes and other ills.

Schwarz estimates lacosamide sales may reach $1bn a year. The drug would compete with Pfizer’s Lyrica and products by Eli Lilly & Co of Indianapolis and Paris-based Sanofi- Aventis.

Rothschild advised Schwarz Pharma, while Lazard and Braveheart Investment Group advised UCB. BNP Paribas and Fortis agreed to provide credit to finance the transaction.