Mylan Outbids Teva and Private Equity Investors to Acquire Merck KGaA's Generics Unit

Merck's KGaA's generics unit was finally snapped up by U.S. generics firm Mylan Laboratories for US$6.7 billion in an all-cash deal. The acquisition sets the seal on a long bidding process involving companies such as Ranbaxy, Torrent (both India), Actavis (Iceland) and Teva (Israel). The deal is expected to be closed in the second half of this year, subject to regulatory approval. The combined entity is expected to earn revenues of US$4.2 billion and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of US$1 billion on 560 products. Mylan's CEO Robert Coury said the acquisition extends its range of therapeutic categories and dosage forms, providing the firm with marketing opportunities in Europe. In 2006, Merck KGaA's generics division garnered sales of 1.81 billion euro (US$ 2.4 billion) and its top-selling products included omeprazole, simvastatin and paroxetine.

Mylan's Future Plans

Mylan is now striving to use its Indian acquisition, Matrix Laboratories, as an active pharmaceutical ingredient (API) platform for vertical sales, while Merck's unit will provide impetus in the United States—through respiratory franchise Dey—as well as in Australia, France, Japan, Portugal, Spain and the United Kingdom. The company is optimistic of breaking even by the second year of integration with long-term compounded net income growth expected to exceed 30% annually on a revenue growth of over 10%. By the third year, the deal is expected to generate US$250 million in synergies. The combined Mylan and Merck European sales will be in the region of US$1 billion.

One of the key areas of growth Mylan inherits from Merck is the respiratory portfolio in the United States, which has seen annual growth of 10% for Merck KGaA, contributing 478-million-euro sales in 2006. Dey, the U.S.-based respiratory franchise includes Duoneb and Epi-Pen. With three products currently in development—namely racemic foroterol tartrate, a beta agonist plus corticosteroid and a third, unnamed product—the franchise is set to sustain the current growth levels in the United States.

In terms of European sales, France, Germany and the United Kingdom provide the bulk of sales at combined revenues of over US$500 million. The split in Merck's geographical revenues puts Europe in the lead, followed by America and the Asia Pacific region.

Outlook and Implications:

The acquisition presents a leap for Mylan Laboratories in the global generics table and is the second major acquisition after Matrix Laboratories last year. The deal entails many advantages for Mylan, and could help the U.S. firm to address a range of therapeutic areas and regions. The forthcoming quarters will focus on achieving synergies between Mylan's two units, Matrix and Merck KGaA generics. The acquisition at 2.7 times sales is in line with earlier projections—and indeed Merck management's estimate—to achieve a 2.5-3 multiple.

The deal represents a phase of rapid consolidation in the generics market, which has seen close to 18 deals since 2005 involving the leading players: Teva, Novartis, Actavis Barr Laboratories, Stada and Indian companies Ranbaxy, Wockhardt and Dr Reddy's Laboratories. In the Wall Street Journal, Mylan CEO Coury called the deal a "dog fight" and compared the acquisition to that of to a beach-front property going "down to last minute'. The fact that Mylan prevailed against at least five pharma firms bidding for the generics units, apart from consortiums of private equity investors, shows the intense level of competition gripping the acquisition of every generics firms up for sale, particularly in Europe.

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