Drug Takeover Valuations Soar as Par Pharma Gains 300%

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To see just how much drug-company valuations have ballooned, check out Monday’s takeover of little-known generics maker Par Pharmaceutical Holdings Inc.

Par was taken private in 2012 by TPG Capital for about $1.9 billion. Now it’s selling for more than quadruple that price to Endo International Plc, another drugmaker. Endo’s stock fell 5.4 percent after it announced the deal, which is its largest and most expensive. It’s valuing Par at about 55 times 2014 earnings before interest, taxes, depreciation and amortization and 7.5 times revenue, according to data compiled by Bloomberg.

Takeover valuations are “going through the roof” in the pharma and biotech industries, Frank Orthbandt, a London-based analyst for Fitch Ratings, said in a phone interview. “The expectation is that prices are continuing to rise and that we’re coming to an end of this low-interest-rate period in the U.S., so you had better bite the bullet and buy now at a very high valuation.”

Acquisition prices this year for pharmaceutical and biotechnology companies such as Par are the highest relative to Ebitda and revenue in at least 20 years, according to data compiled by Bloomberg based on median multiples for deals. There was a 63 percent jump in the median Ebitda multiple this year, the biggest annual increase since 1998.

‘Selling Moment’

Private-equity firms such as TPG are using this as an opportunity to exit their investments as growth-hungry strategic buyers show a willingness to pay the rich multiples. Many leading drugmakers are reeling from patent losses on what were once their most lucrative products, so they’re paying up to replenish their pipelines. Others are taking advantage of low tax rates gained from moving their headquarters to places such as Ireland.

“This is a selling moment if you’re a financial owner of companies, and it is a buying and consolidation moment if you’re a well-capitalized public company that has a stock that is trading really well,” Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners LLC, said in an interview on Bloomberg radio Monday.

Fitch Ratings cautioned in a report last month that acquisitions of biotech companies with only experimental drugs and no marketed products are risky at these prices and could weaken the acquirers’ credit quality.

Treatment areas such as cancer, cardiovascular and rare diseases are where suitable targets are scarce and thus seeing particularly lofty takeover prices.

For the younger drug developers, it’s based on “a nebulous calculation of potential peak sales,” Orthbandt of Fitch said. “In those cases, you have to rely on a lot of assumptions.”

Par Value

Those types of transactions differ from Monday’s takeover of Par, which does generate revenue. It will add about $1.2 billion of annual generic sales to help Endo overtake Sun Pharmaceutical Industries Ltd. as the fifth-largest seller of generic medicines, according to Elizabeth Krutoholow, an analyst for Bloomberg Intelligence.

Endo said Monday that Par is one of the largest suppliers of extended-release products -- which are harder to copy and manufacture than regular generic medicines -- and it’s also been growing in sterile injectables. Par’s expansion in those areas may explain the large increase in the company’s value over the past three years.

“Endo really made it clear during their call that the injectable business has gotten far more useful and successful, and also the extended-release business is really where we’re seeing generics going,” she said. “I think that made Par more valuable than before it went private.”

(Corrects Ebitda multiple in the second paragraph of the story, which was first published on May 18.)

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