Mylan N.V.; market cap as of 12/02/2016: $20.54bn
Meda AB; market cap as of 12/02/2016: kr52.44bn ($6.24bn)

Introduction

On February 10, Mylan NV (NASDAQ: MYL.O) announced its acquisition of Meda AB (STO: MEDAa.ST) in a deal worth $7.2bn made of cash and stock, while the latter reported an unexpected slowdown in growth in the fourth quarter. Still good news for Mylan’s board, which has been trying to expand and diversify through deals in the past years. The agreement was reached after Mylan’s first two fruitless attempts to buy the Swedish company, and only three months following its seven-month pursuit of smaller rival Perrigo (TLV: PRGO.N).

The acquirer will fork out $19.62 per share, which represents a 92% premium over Meda’s closing price of $10.22 per share on February 10. This premium fits among the highest premiums in pharmaceutical deals worth over $5bn. Nevertheless, the transaction merely places itself in the center of the pack in terms of earnings multiples, in fact the total $9.9bn value of the transaction (which considers also Meda’s net debt) represents a multiple of approximately 8.9x 2015 adjusted EBITDA with synergies.

About Mylan N.V.

Mylan N.V. is one of the world’s leading generics and specialty pharmaceutical companies, catering to over 165 countries. It was founded in 1961 by Don Panoz in the Netherlands, although its operational headquarters are located in Hatfield, Hertfordshire in the United Kingdom.

In 2007, Mylan took over India-based Matrix Laboratories for $736m in cash. The deal turned Mylan overnight into one the world’s largest manufacturers of active pharmaceutical ingredients (API) and significantly helped it vertically integrate the production of its finished dosage form (FDF) medicines. Through this acquisition, Mylan grew from the United States’ third to the world’s second-largest generic and specialty pharmaceuticals company.

Today, Mylan’s global manufacturing platform continues to grow, reaching the United States, Brazil, France, Hungary, Ireland, the United Kingdom, India, Japan, and Australia. It has a 65-billion oral solid dose manufacturing capacity, 80% of which are produced internally, through the involvement of approximately 30,000 employees who make over 1,000 distinct products and pharmaceutical ingredients.

About Meda AB

Meda AB is also a leading international specialty pharmaceutical company, with a broad product portfolio reaching more than 80% of the global pharmaceutical market. It was founded in 2001 by Jorg-Thomas Dierks and is headquartered in Solna, Sweden. Its sales at the end of 2014 amounted to more than $1.78bn, placing it 48th in the list of the world’s largest pharmaceutical firms.

The Swedish company never conducts early-stage pharmaceutical developments. Meda combines proprietary production with contract manufacturing of drugs. Its proprietary production takes place in Germany, France, Ireland, Italy, the United States, and India.

It focuses on reducing the cost of goods through its heavy investments in its sales and marketing departments. In fact, the latter employ over 60% of its workforce and the company has its own sales organizations scattered in more than 60 countries across the world.

Meda has been listed since 1995 at the Stockholm Stock Exchange (STO) and is now part of the Nasdaq OMX Nordic 120 index, however not of the OMX Nordic 40.

Industry Background

In 2015, the transaction sizes of mergers and acquisitions in pharma have reached an all-time high and the revenue multiples displayed by the deals in this sector have been much higher than those of other industries. As an example, 2015 bills as Valeant’s purchase of Salix ($15bn), Mylan’s failed hostile acquisition of Perrigo ($53bn), and Pfizer’s maxi takeover of Allergan were among the biggest ever in the pharmaceutical industry.

There has been plenty of peer pressure to make deals. Indeed, some investors have been criticizing pharmaceutical companies that have stayed on the sideline during the last M&A wave. However, others have criticized those companies that may have paid too high prices for their targets. The high valuations have probably been boosted by pharma companies’ low borrowing costs and deep market liquidity but it doesn’t seem likely that the M&A exuberance will go on for long.

In the future, pharma companies will have a hard time restructuring especially in response to a lower healthcare spending from governments. The need to reshape will also rise as analysts have predicted that the cost of R&D expenses will become prohibitively expensive for medium-sized enterprises. It is possible to forecast four main strategies that pharma companies may implement according to their characteristics when adjusting their structure: large pharma firms that excel in R&D will act as developers of innovative drugs and will be likely to outsource manufacturing; large manufacturers will use M&A to gain market access and expand their production capacity; players that focus on a niche competence and develop a strong market share in one particular area will also be likely to outsource manufacturing.

Deal structure

At announcement (February 10), Mylan’s cash-and-stock offer consideration valued each Meda share at 165 Swedish Kronas (SEK, around $19.6), for a total equity value of approximately SEK 60.3bn, or $7.2bn. Mylan will also take on Meda’s net debt, leading to a total deal value of about $9.9bn. The premium offered on the shares is as high as 92% when looking at the closing share price of SEK 86.05 per Meda share on the last trading day before announcement (February 10). It goes down to 68% when looking at the volume-weighted average share price over the last 90 trading days up to February 10, and to only 9% when taking as a reference the intraday high in the 52-week period up to the day prior to the announcement. The premium paid is among the highest in pharmaceutical deals worth over $5bn, especially considering that Meda is an established company with good growth opportunities, but it is not in possession of any strategic asset in development/approval phase that could justify such a high consideration. Considering the value offered to Meda’s shareholders through the premium, Meda’s board has unanimously recommended acceptance.

As noted above, the tender offer consists of both cash and stock. Specifically, Mylan is offering SEK 165 per Meda share in cash for 80% of the shares tendered by each shareholder, while for the remaining 20% the consideration will be made up of Mylan’s shares, in an amount to be calculated on the basis of the “Offeror Average Closing Price” (OACP). The latter refers to the volume-weighted average sale price per Mylan share on the NASDAQ Global Select Stock Market for the 20 consecutive trading days ending on and including the second trading day prior to the offer being declared unconditional (i.e. at least 90% of shares tendered, under Swedish law). If the OACP is greater than $50.74, Mylan will offer SEK 165 divided by the OACP of own stock for each Meda share, at an exchange rate of SEK/USD 8.4158. If the OACP is between $30.78 and $50.74, then each shareholder will get 0.386 Mylan Shares per Meda share. Finally, if the OACP is below $30.78, each Meda share will be converted into Mylan shares for an amount equal to SEK 100 divided by the OACP, again at a SEK/USD exchange rate of 8.4158.

The deal is not subject to any financing conditions. The cash portion will be fully financed through a new bridge credit facility arranged by Deutsche Bank Securities Inc. and Goldman Sachs Bank USA.. With respect to the stock portion of the consideration, Mylan is planning to list the new shares to be issued in the offer on the NASDAQ Global Select Market in the U.S. and on the Tel Aviv Stock Exchange in Israel.

Under Swedish law, the offer will become unconditional when at least 90% of Meda’s shares have been tendered, in which case Mylan plans to freeze out the remaining minority and finalize the full merger. The deal is expected to close by the end of the third quarter of 2016, with the acceptance period of the offer running from 20 May 2016 to 29 July 2016. Under recommendations of the board, two of Meda’s largest shareholders have already undertaken commitments to tender their stakes. These are Stena Sessan Rederi AB and Fidim S.r.l., which own approximately 21% and 9%, respectively, of the outstanding shares and votes of Meda. The offer is not subject to the approval of Mylan’s shareholders, but its completion is conditional on clearance from the relevant competition authorities.

Deal Rationale

As noted in the company’s description, Meda is a large, well-established company with world-scale operations and a strong focus on three key therapeutic areas: respiratory (allergy-related), dermatology, and pain. Meda has a strong presence, especially in Western Europe, in the over-the-counter (OTC) market, with about 40% of its sales revenue coming from such products. Mylan and Meda had also previously engaged in a partnership for the commercialization of EpiPen® Auto- Injector, a medical device for injecting, in case of anaphylactic shock from allergies, a measured dose or doses of epinephrine (adrenaline) by means of auto-injector technology.

Before moving on to the analysis of the pros and cons of the deal, it is useful to make a distinction, quite blurry in reality but helpful in this case, between two different “types” of pharma deals, belonging to different M&A strategies and with different final aims, but both indifferently employed by big pharmaceutical companies. The first strategy consists of identifying small targets, either start-up companies or firms with just a few years of life whose main strength is the in-house development of innovative drugs for the treatment of rare diseases, and acquire them when the time is right, that is, when the drugs under development have passed at least the first or second stage of regulatory approval (whatever the regulatory authority, depending on the country in question). This is done because the costs and time that in-house development requires are incredibly high, especially considering that all this comes with great risk of rejection by the regulatory authority. Thus, it becomes much easier to proceed with acquisitions of the kind just described for companies that have the scale and resources to do it (an example of this kind of deal is the Shire-Dyax acquisition). The second strategy is instead a much more “sterile” one, that is, it is one dictated by the need to keep up profits through increases in scale. In these deals, which because of their nature occur primarily among established companies with a defined market share, the only purpose is to benefit from the increased scale, geographical reach, and market share resulting from the acquisition. These moves permit large companies to keep growing, although at very low rates and with limited perspectives, if not to close another deal in the next few years. With the introductory lines to this paragraph and the company description in mind, it is clear that the Mylan-Meda deal falls within the second category.

Proceeding to the merits of the deal, according to both companies the transaction has a compelling strategic fit, and indeed there seems to be reasonable grounds to believe so. The combined company will be a diversified pharmaceutical leader, with a strong presence across geographies and therapeutic categories. The acquisition will allow Mylan to build a strong presence in the European market, and to grow stronger in the OTC market (the deal should create an approximately $1bn OTC business at close) as well as in the dermatology, pain, and respiratory/allergy areas. With regard to the latter, the transaction will also help consolidate EpiPen® Auto-Injector in Europe, providing greater opportunities to build the brand in this region. The combined business will have a balanced portfolio of more than 2,000 products across the branded/specialty, generics and OTC segments, sold in more than 165 markets around the world for a total sales value exceeding $11bn. Mylan expects to extract, starting from year four, an annual $350m of pre-tax operational synergies, arising from cost savings (removing redundant general and administrative costs and exploiting economies of scale and scope from the combined commercial platform) and cross-fertilization opportunities of the combined product portfolio.

The deal is expected to be immediately accretive to Mylan earnings, creating an opportunity to achieve $0.35 to $0.40 in accretion in 2017, accelerating the achievement of Mylan’s previously stated $6.00 in adjusted diluted EPS target in 2018.

Mylan’s leverage at the close of the transaction is expected to be approximately 3.8x debt-to-adjusted EBITDA and according to the company’s management, the significant cash flows generated by the company will allow for rapid deleveraging.

Overall, the deal appears to be reasonable in strategic terms, insofar as it allows both companies to achieve scale and scope benefits thereby stimulating growth, at the same time not precluding further M&A activity in the near future thanks to the rapid elimination of debt. Meda’s shareholders are the ones getting the most value out of the transaction, as they are being offered (mostly in cash) almost double the value of their holdings.

Market Reaction

Meda shareholders welcomed the deal, driving up shares traded in Stockholm by 70% to $17.4. Wednesday Meda’s shares closed at 86.05 crowns and on Thursday they closed at 143.9. Mylan shares instead closed at $50.54 Wednesday on the Nasdaq and on Thursday at $41.42, losing 18%.

It has to be said that the Netherlands-based company had also reported fourth-quarter earnings that missed Wall Street’s expectations, but it was the deal announcement that upset investors. Moreover, because Mylan made repeated bids for Meda back in 2014 but was rejected even after raising its offer, what disappointed investors was not the choice of the target which, after the failure of the bid for Perrigo, was not totally unexpected. Rather, analysts’ reaction was due to the 92% premium over Meda’s market value before the acquisition was announced which represents the biggest premiums ever paid in the M&A pharma industry.

Advisers

Mylan hired Centerview Partners as a financial adviser for the deal with Meda, and Cravath, Swaine & Moore LLP, Vinge, and NautaDutilh as its legal advisers. Rothschild & Co. was Meda’s financial adviser. Deutsche Bank and Goldman Sachs are providing financing to Mylan for the cash portion of the deal via a bridge credit facility.

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