Meda Cash Flow Invites Pipeline Deal at 95% Discount

Meda AB (MEDAA), Sweden’s biggest publicly traded drugmaker, is offering one of the best deals in the world for pharmaceutical companies looking to replenish their pipelines by swallowing up rivals.

As of yesterday, the $2.78 billion company was trading at 5.4 times its projected cash flow in 2013, cheaper than 95 percent of specialty drug companies with market values larger than $1 billion, according to data compiled by Bloomberg. Meda was also valued at a discount of more than 70 percent to its competitors relative to sales and net assets, the data show.

While Meda in February said margins will suffer this year as it boosts spending on marketing, earnings are projected to reach a record in 2013, helped by sales from drugs such as its Dymista allergy medicine, which won U.S. approval this month. With Dymista poised to become the company’s top seller and at least six more drugs set to reach the market in coming years, Solna, Sweden-based Meda could lure suitors such as Valeant Pharmaceuticals International Inc. (VRX) and Takeda Pharmaceutical Co., according to Nordea Bank AB. (NDA)

“Clearly, there would be some value for an acquirer,” Peter Lampert, a Calgary-based analyst at Mawer Investment Management Ltd., which oversees about $12 billion and owned 1.4 million Meda shares as of Jan. 31, said in a telephone interview. “They have some good assets and generate a lot of cash flows that should be attractive to a lot of pharmaceutical companies.”

Anders Larnholt, a spokesman for Meda, declined to comment on whether the company has been approached by a buyer or would consider a takeover.

Margin Squeeze

Shares of Meda rose 4.9 percent to 68.75 kronor in Stockholm, the biggest gain among all 36 health-care companies in the Stoxx Europe 600 Index.

Meda’s products, focused on respiratory, cardiology, dermatology, central-nervous-system, pain and inflammation treatments, generated sales of 12.9 billion Swedish kronor ($1.8 billion) in 2011.

Meda’s earnings before interest, taxes, depreciation and amortization climbed 9 percent in 2011 to 4.7 billion kronor, or more than 36 percent of sales. The company said it expects Ebitda margins will be closer to 30 percent this year as it increases spending to market new drugs, introduce over-the- counter medicines in Europe and expand in emerging markets. While that would approach a five-year low, Meda is projected to resume margin growth next year and in 2014, when analysts project record Ebitda of 5.28 billion kronor, at more than 35 percent of estimated sales, according to data compiled by Bloomberg.

Growth Potential

“They have interesting products and their potential is probably not reflected in the estimates until we see more of their progress,” Markus Larsson, a fund manager who helps manage 500 million euros ($639 million) at Helsinki-based Fondita Fund Management Co., which holds Meda shares, said in a phone interview. A takeover bid is “definitely” possible, he said. “It wouldn’t be a surprise.”

Shares of Meda closed yesterday at 65.55 kronor, down 8.5 percent for the year and 49 percent from its all-time high of 127.58 kronor in December 2006. At 5.4 times its projected 2013 cash from operations after deducting capital expenses, Meda was trading at a cheaper multiple than 63 of the 66 other specialty pharmaceutical companies with a market value larger than $1 billion, according to data compiled by Bloomberg. The median for the group was about 16 times.

The company was also less expensive than competitors relative to its 2011 sales, trading at 1.5 times revenue compared with the average for the group of 6 times, the data show. Meda traded at 1.3 times its book value, versus an average 4.6 times for peers.

‘Prove-It’

“On valuation, the stock’s really cheap,” Todd Bassion, who helps manage more than $1 billion including Meda shares at Delaware Investments in Boston, said in a telephone interview. “The main reason it’s cheap is they’ve re-based people’s margin expectations. They’re saying they’re making these investments, so now it’s kind of a prove-it story and they have to really show that they’re coming to the market and really are generating organic growth.”

Delaware Investments is part of Macquarie Group Ltd.

Meda may attract bigger rivals as they seek new products to replace those losing patent protection, Les Funtleyder, a health-care portfolio manager in New York at Miller Tabak & Co., which manages $800 million and doesn’t own Meda, said in a telephone interview. Globally, the drug industry faces the possible loss of more than $21 billion in sales this year from patent expirations, according to data compiled by Bloomberg.

Pipeline Power

“What do most pharma companies need these days? Product or pipeline or both,” Funtleyder said. “Meda has a number of products that could make it salable and this new one, Dymista, is an additional revenue generator.”

Dymista, a prescription nasal spray for treating seasonal allergies, could become the company’s top-selling treatment, with revenue potentially reaching 2.37 billion kronor in 2016, Luisa Hector, an analyst at Credit Suisse Group AG, wrote in an April 30 report. The drug will be available later this year in the U.S., where about 60 million people are affected by seasonal allergic rhinitis, according to the company.

Meda is seeking approval for two dermatology products, Zyclara and a combination product containing clindamycin and tretinoin. The company also acquired Antula Holding AB for 1.8 billion kronor last year, adding several over-the-counter products to its portfolio and a pipeline that may result in four new products in the coming years, according to its annual report.

Valeant Deals

“There is a dividing line between pharmaceutical companies that have new products and those that do not,” Chief Executive Officer Anders Loenner said in the company’s May 9 earnings statement. “Meda has a valuable pipeline of products that are also close to market.”

Meda and Valeant have a history of doing deals together. Valeant, based in Mississauga, Ontario, last June bought the rights to sell two of Meda’s medicines in the U.S. and Canada. In 2008, Valeant sold its European drug business to Meda, giving the Swedish company access to the faster-growing eastern European markets.

“Given that they have so many collaborations, integration would be relatively straightforward,” Patrik Ling, an analyst at Nordea Bank in Stockholm, said in a phone interview.

Looking for Opportunities

Valeant may also want access to Meda’s geographic coverage in Europe, where Meda has expanded sales since buying the business from Valeant. About 63 percent of Meda’s 2011 sales were generated in western Europe, the company said in its annual report. That compares with 19 percent for Valeant, according to according to a regulatory filing in February.

“We think we can continue to find really interesting opportunities, acquisitions at good prices, and add them and at the end of the year have a pretty significant impact on the top line and bottom line,” Valeant Chief Financial Officer Howard Schiller said at a health-care conference in Boston on May 7.

Valeant approached Meda last year, two people familiar with the matter said in July. At the time, the company declined to comment.

Laurie Little, a spokeswoman for Valeant, wouldn’t comment on whether the company is currently exploring a purchase of Meda or if it has done so in the past.

Takeda, Asia’s biggest drugmaker, is also considering more takeovers as its best-selling diabetes treatment Actos loses patent protection this year. The Osaka-based company in September bought Swiss drugmaker Nycomed for 9.6 billion euros.

No Blockbusters

“They have said publicly they are looking at more acquisitions, and it was rumored last year that they were also looking at Meda when they bought Nycomed,” Ling said. “So they might still be interested.”

Mitsuo Oguri, a Takeda spokesman in Tokyo, declined to comment on whether the company is currently exploring a purchase of Meda or if it has in the past.

“Our priority is integrating Nycomed,” said Oguri by telephone today. “However, we are looking into all options including acquisitions that strengthen the foundation of our business or boost our pipeline.”

While Meda has a number of products, none are the type of standout drug that big pharmaceutical companies look for when considering acquisition targets, Chris La Jaunie, a New York- based portfolio manager at Victory Capital Management Inc., which oversees about $28 billion and owned shares of Meda as of Dec. 31, said in an e-mail.

‘Manageable’ Debt

“Meda has a portfolio of successful smaller market drugs, but no blockbusters,” La Jaunie said. “Large pharmas really want the latter.” Even Dymista will compete in a crowded allergy-medicine market where generics are available, La Jaunie said.

An acquirer would be buying a company with more debt relative to Ebitda than 95 percent of its competitors, according to data compiled by Bloomberg.

Still, Meda’s net debt, at 3.5 times Ebitda in 2011, is down from its peak of 13 times in 2005, the data show.

“It’s actually kind of mid-range of where it’s been historically,” Bassion at Delaware Investments said. “It’s definitely manageable.”

Even without a takeover, Bassion predicts the company’s shares could reach 85 kronor, almost 30 percent more than yesterday’s closing price. A buyer could offer another 30 percent on top of that, he said, which would value the company at more than 33 billion kronor, or $4.7 billion.

“There’s certainly some aspects that would be attractive to other companies,” given Meda’s product pipeline and historical growth trends, Bassion said. “It’s basically a chance to get a pharma company at very cheap valuations.”

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Makiko Kitamura in London at mkitamura1@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Phil Serafino at pserafino@bloomberg.net.

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