Reckitt Heroin-Abuse Drug Seen Luring Shire: Real M&A

Reckitt Benckiser Group Plc’s heroin addiction treatment could tempt drugmakers from Shire Plc to Actavis Plc to bid for the company’s pharmaceuticals unit.

Shire has been on the hunt for deals to ease reliance on its best-seller Vyvanse for attention deficit hyperactivity disorder. The Dublin-based drugmaker could be a logical buyer for the unit because it has managed competition with generics before and is adept at handling complex U.S. rules to curb illicit use of prescription medicines, Liberum Capital Ltd. said. While generic variants of Reckitt Benckiser’s Suboxone were introduced this year, the drug still dominates the U.S. market and a new injectable treatment is under development.

Shire surged to a record this week, increasing its ability to finance an acquisition with stock, and also has more cash on hand than 99 percent of specialty drug companies, according to data compiled by Bloomberg. Generic-drug makers Valeant Pharmaceuticals International Inc. and Actavis also may be interested in the RB Pharmaceuticals unit based on their experience extracting profits from assets that, like Suboxone, have declining sales, Sanford C. Bernstein & Co. said.

“There is definitely a lot of future potential in RB Pharma,” said Andrew Wood, an analyst at Bernstein in Singapore. “There must be some pharma companies out there who think that they can do even better, and take it to the next level.”

Weighing Options

Reckitt Benckiser said this month that it’s weighing options for its pharmaceuticals unit, whose main drug Suboxone treats addiction to opioids including heroin. The company, which also makes French’s mustard, Nurofen painkillers and Durex condoms, hasn’t yet hired advisers and said it plans to update investors on the progress of the review next year.

Andraea Dawson-Shepherd, a spokeswoman at Slough, England-based Reckitt Benckiser, declined to comment on the review process. Reckitt Benckiser shares rose 1.2 percent today to 4,848 pence.

Since 2010, RB Pharma has offered Suboxone in a film-strip format, which has captured more than two-thirds of the $1.7 billion market in the U.S. While the film version is patent-protected until at least 2020, it’s grappling with increased competition.

Zubsolv, a tablet from Orexo AB, won U.S. regulatory approval in July and began selling in September. Plus, two generic Suboxone tablets hit the market in March.

Not Core

RB Pharma is “a fantastic business, but it’s not core to the company,” Reckitt Benckiser Chief Executive Officer Rakesh Kapoor said in a phone interview on Oct. 22, when the company announced the review. “I’ve said that several months after the entry of generics we will confirm the resiliency of the film business and the impact of generics. We are now in that phase. Nothing is ruled out.”

Analysts including Bernstein’s Wood have advocated a sale of RB Pharma. The unit, which is also developing an injectable version of Suboxone and a drug for people addicted to cocaine, may fetch 2.95 billion pounds ($4.7 billion) in a sale, according to the average of 11 analysts’ estimates compiled by Bloomberg. The estimates ranged from as low as 1.5 billion pounds to as high as 4.7 billion pounds.

RB Pharma’s 837 million pounds in sales last year accounted for about 9 percent of Reckitt Benckiser’s revenue, and the unit made up 21 percent of operating profit.

While competition reduced the division’s sales in the last two quarters, the market for opioid addiction treatment isn’t in decline.

Heroin Use

As of 2011, some 4.2 million Americans had used heroin at least once in their lives, according to the National Institute on Drug Abuse, which estimates that about 23 percent of individuals who use heroin become dependent on it. About 16.5 million people worldwide use opiates, including heroin, according to a report this year from the United Nations Office on Drugs and Crime.

Suboxone only treats about 15 percent of the addressable market, Reckitt Benckiser has said.

“It appears there is a long runway for further growth,” Bernstein’s Wood said in an e-mail.

RB Pharma President Shaun Thaxter told investors last year that Suboxone, which combines a painkiller derived from the opium poppy and a chemical that blunts withdrawal symptoms, could expand sales in Europe and Australia.

Diversification Play

For Shire, adding Suboxone would allow it to reduce its dependence on ADHD treatments. Shire knows how to navigate the complex rules surrounding so-called controlled substances, a category which includes most ADHD pills and opioid-dependency drugs like Suboxone.

“Diversifying away from being an ADHD business would be helpful because they have one product being the dominating earnings driver: Vyvanse,” Naresh Chouhan, a London-based analyst at Liberum Capital, said in a phone interview. “They’ve also got a supply chain in place which means the drug won’t end up in the wrong hands.”

Shire also has experience winning sales in the face of threats from generics. The company successfully persuaded doctors to switch patients to Vyvanse before the older version Adderall XR lost patent exclusivity in 2009, helping sales of Vyvanse gain last year.

“Reckitt’s pharma unit is a declining business and it’s really hard to manage a decline, but Shire has done this before,” Chouhan said.

Deal Firepower

Shire CEO Flemming Ornskov has been scanning the industry for potential targets since taking over at the company in May. Shire has “multi-billion dollar capacity” for deals and is looking in areas including rare disease, neo-natal care, eye care and cancer, management said after reporting earnings last week.

Shire has the firepower for acquisitions as its stock reached a record 2,814 pence earlier this week. It rose 0.4 percent to 2,772 pence at 10:32 a.m. in London. The company also had $1.69 billion of cash as of Sept. 30, surpassing more than 1,000 other specialty pharmaceutical companies, according to data compiled by Bloomberg. Only Valeant, Elan Corp. and Allergan Inc. had larger cash piles, the data show.

Jessica Mann, a spokeswoman for Shire, said the company doesn’t comment on speculation.

Other drugmakers including Valeant, which had $2.54 billion of cash as of June 30, and Actavis might be interested buyers because the companies know how to make the most of assets with declining sales, said Ronny Gal, a New York-based analyst at Bernstein who covers pharmaceutical companies. Actavis is one of the companies that have come out with a generic Suboxone tablet.

‘Good Opportunity’

“It’s very simple,” Gal said. “If you’re paying less for the asset -- even if it’s declining -- than you can get out it, it’s very much a good opportunity.”

A representative for Parsippany, New Jersey-based Actavis declined to comment, while a phone call and e-mail to a representative for Bridgewater, New Jersey-based Valeant wasn’t returned.

While RB Pharma may attract pharmaceutical companies looking for products to add to their lineups, other drugmakers may be more likely to pursue medicines with more growth potential.

“Most companies are not interested in declining assets,” Gal said.

Shire CEO Ornskov said the company’s focus is on “growing assets,” when asked last week about its interest in the RB Pharma unit.

Dominant Player

Suboxone still dominates the opioid-dependency treatment market, and new medicines in development such as the injectable version of the drug could help keep it in the lead. With generics entering the market, a pharmaceutical company may be best able to contend with the threat, said Eamonn Ferry, a London-based analyst at Exane BNP Paribas.

“Reckitt is not a pharma company, that’s not where their expertise is,” Ferry said in a phone interview. “It’s not in their core DNA to manage products that have been subjected to generics. It may well be better in the hands of a pharmaceutical company, and you could say the same about the pipeline.”

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