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Fresenius Spends Billions On a Falling Akorn

Stephan Sturm can't resist a deal.

Stephan Sturm can't resist a deal. After paying 5.8 billion euros ($6.3 billion) for Spain's top private hospital operator in January, the boss of Fresenius SE is having a two-transaction happy meal for dessert. He only stepped up to the helm in July, having steered plenty of other transactions for the company before that.

Faith Healer

Investors have warmed to Fresenius's M&A activity

Source: Bloomberg

Fresenius is to pay $4.3 billion for Akorn Inc., an Illinois-based maker of drugs ranging from injected medicines to nasal sprays. Strategically, it fits with Fresenius's skills in liquid medicines and opens up a new U.S. retail channel.

The second deal, for rival Merck KGaA's so-called biosimilars operation, is a strategic departure into a new area of R&D. Biosimilars are copycat versions of drugs more complex than those usually imitated by generics.

The Akorn purchase exploits the target's recent share-price weakness, caused by concerns about the competition facing its lead drug. At $34 per share, the offer is 41 per cent above Akorn's three-month average price. That high-looking premium is worth about $1.2 billion -- roughly double the estimated present value of the $100 million of yearly "mid-term" synergies anticipated by Fresenius.

Falling Akorn

Bid for the U.S. healthcare group comes after a tricky second half of 2016

Source: Bloomberg

Despite that, the deal should deliver acceptable returns. Akorn shares were trading at the offer level as recently as July. Add the projected synergies to Akorn's forecast operating profit of $430 million for 2020 and the transaction should make an 8 percent post-tax return in three years, matching its cost of capital. Taken in isolation, the acquisition will boost earnings per share from 2019 onwards. 

Might a rival such as Baxter International Inc. or Mylan NV gatecrash? It's possible, although both are busy elsewhere.

The snag is that these financial gains are effectively subsidizing the more speculative Merck deal. Here, Fresenius is paying 170 million euros up front plus 500 million euros if milestones are met. The payback on this will be more distant. First sales won't come before 2019, with break-even in 2022. Until then, it's all cash burn. As a pair, the transactions dilute earnings until 2020.

Investing in biosimilars is risky. It's a crowded space with an uncertain payback, as my colleague Max Nisen has observed. At least Fresenius has capped the total investment it will make in the biosimilars operation at 1.4 billion euros. Investors know the downside, and given Fresenius's impressive performance versus peers in the last two years, they can give management the benefit of the doubt.

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

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