Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The pharmaceutical feeding frenzy continues.

The latest target is Germany's Stada Arzneimittel AG, a maker of copycat drugs that have lost patent protection. Private equity is circling and investor expectations of a deal pushed the shares up as much as 15 percent on Monday. A buyout could make sense -- but wouldn't be easy.

Generic drug businesses are in vogue. For the pharma majors, owning some generics is a hedge against falling sales when blockbuster medicines become vulnerable to competition. Swiss drugmaker Novartis AG, for example, has its own sizable generics business and is expected to grow it through bolt-on deals.

Stada has revealed two approaches, including one from private equity firm Cinven Ltd. at 56 euros a share, valuing the group at 3.5 billion euros ($3.7 billion). The question is why a financial buyer thinks it has the slightest chance snaring a business such as this in the face of likely interest from a big pharma group that could probably afford to pay more thanks to its ability to cut costs.

One answer is that Cinven -- and other buyout firms -- may see opportunity in cleaning up Stada before selling it to a large drugmaker in a few years' time. It certainly looks like Stada could be run better. Sales growth slowed from 9.6 percent in 2013 to less than 3 percent in 2014 and 2015 and an estimated 1 percent last year. Under pressure from an activist investor, it's changed CEO and reviewed its strategy.

Copy That
Generic drugmaker Stada has outperformed in recent months following an activist assault
Source: Bloomberg

Perhaps Cinven reckons it can trim some costs and then split the generics business, which accounts for 58 percent of sales, from Stada's branded drugs unit, running separate auctions for each. Big pharma players often prefer such fix-it operations to be done by someone else, and may be willing to pay higher multiples for a repaired business.

Including assumed net debt, the Cinven proposal values Stada at almost 5 billion euros. That's just under 12 times estimated 2016 Ebitda. The average for global generics deals over the past five years is 12.4 times, according to data compiled by Bloomberg. Cinven would want to exit at a higher multiple. As Kepler Cheuvreux analysts note, some comparable generic businesses have gone for as much as 15 times Ebitda.

There's More to Give
Cinven's pitch for Stada is at a low EV-Ebitda multiple versus other pharma deals in the past five years
Source: Bloomberg

If a deal could be funded with at least 50 percent borrowed money, that would imply an equity check of 2.5 billion euros and debt of less than six times Ebitda. Suppose a new owner can get Ebitda to 550 million euros over five years, just a tad above what Stada's own target is for 2019. Also suppose, a little more optimistically, that the business fetches a 14 times multiple on exit. In that case, the proceeds would be 7.7 billion euros. Deduct the debt, and that's about 5.2 billion euros for the equity, or 2.1 times the original sum invested. Not half bad.

The snag is that Cinven isn't alone in seeing an opportunity here. Returns won't look so tasty if an auction pushes up the price on the way in.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Hughes in London at

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Katrina Nicholas at